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REVERSE MORTGAGES - PROS AND CONS

A reverse mortgage is a special type of home loan that allows the homeowner to convert a portion of the equity in their home into cash. The equity that has built-up over years of home mortgage payments can be paid to you, however, unlike a traditional home mortgage, equity loan or second mortgage, no repayment is required until the borrower no longer uses the home as their principal residence.

The US Department of Housing & Urban Development (HUD) created one of the first reverse mortgages. It is a federally insured private loan and it’s a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more.

Reverse mortgages are now new and improved. Beginning November 1, 2008, homeowners may borrow up to $417,000.00. The previous cap on lending through the Home Equity Conversion Mortgage program assigned various lending limits, ranging from $200,160 in rural areas to $362,790 in the most expensive housing markets. Existing reverse-mortgage borrowers may be able to refinance their loans to take advantage of the higher lending fee. Another new rule caps the origination fee, previously set at 2% of the mortgage amount, at $6,000.00. In 2009, retirees will be able to use a reverse mortgage to buy a new home.

To qualify for a reverse mortgage you must meet the following requirements:

  • You must be at least 62 years of age. The older you are and the more valuable your house, the lower the interest and the more you can borrow.
  • You must have sufficient home equity – either your home is fully paid off, or you have paid off approximately 40% of the mortgage or you have enough funds to pay down your mortgage by the “shortfall” amount.
  • You are further required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan.

This all sounds great! So what’s the catch? Well there are some. Here are the pros and cons of reverse mortgages.

PROS:

  1. No monthly payment as long as you remain in the home
  2. Simple to qualify because credit score and income are not considered.
  3. Your heirs will never owe more than the home is worth
  4. Proceeds are not taxable
  5. Interest rate is lower than traditional equity loans and home mortgages.
  6. Heirs inherit the home and keep all equity after the reverse mortgage is paid off.

CONS:

  1. The closing costs are about the same as the cost of selling your home. The largest cost is the FHA mortgage insurance and the other large cost is the origination fee (the lender’s fee)
  2. Although Social Security and Medicare are not affected, Medicaid and other need-based government assistance can be affected if you withdraw too much money in one month.
  3. The program is not well understood and requires an independent HUD counseling session prior to receiving the reverse mortgage.
  4. A reverse mortgage must be repaid when the last person on the titles moves out of the property permanently or passes away. If your spouse is not on the title and is living with you and you die, the mortgage would have to be repaid.
  5. If the value of your property is low, closing costs will be a higher percentage of the home’s equity compared to the same loan on a higher-priced home.
  6. If you don’t need the money right away, one shouldn’t rush out to obtain a reverse mortgage. The interest is low, however it’s definitely not free. If you have other funds such as CDs or savings accounts, use them first.

An application for a reverse mortgage is not affected by income, credit history, discharged bankruptcy or health.

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