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Wednesday, December 06, 2006

Reverse Mortgage Info

Understanding and Selecting Reverse Mortgages

What’s a reverse mortgage? In a nutshell, it’s this. In a regular mortgage, you make monthly payments to the lender. But in a “reverse” mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence. Reverse mortgages can help homeowners who are house-rich but cash-poor; they have become an important resource to our senior population.

There are three versions of the reverse mortgage. They include single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; Home Equity Conversion Mortgages (HECMs) which are a federally insured HUD product; and proprietary reverse mortgages, which are issued by commercial mortgage lenders.

Single-purpose reverse mortgages are not available everywhere. In states and cities that offer them, they are a very low cost arrangement and usually available only to low and moderated income households. However they can only be used for one purpose specified by the government or nonprofit lender – for example, to pay for home repairs, improvements, or property taxes.

There are no limitations on the use of funds generated by HECMs or proprietary reverse mortgages, and they are available everywhere. They are more expensive than single-purpose reverse mortgages and their up-front costs can be high. The amount you can borrow with either of these models depends on a number of factors but generally speaking, the older you are and the more equity you hold in the home the more you can borrow.

One of the primary differences between an HECM or private reverse mortgage and a refinance loan is that reverse mortgage loan advances are not taxable and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence.

Some of the facts to keep in mind about these loans:

  • Lenders not only charge origination fees and other closing costs for a reverse mortgage but may also charge servicing fees during the term of the mortgage.
  • The amount you owe on a reverse mortgage generally grows over time. Interest is usually a variable rate and is charged on the outstanding balance and added to the amount you owe each month.
  • Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs.
  • Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses.
  • Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

There are enough pitfalls in reverse mortgages that in the case of an HECM, HUD requires that you meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan’s costs, financial implications, and alternatives. This is a tremendous resource. Shop the loan market all you want, but take what you find to a counselor who can walk you through all your options and compare them, side by side.

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