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BUILDING THE DREAM OF HOME OWNERSHIP

Reverse Mortgages

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A reverse mortgage to purchase a home may help some seniors finance a new place to live. Most seniors take out a reverse mortgage to help them stay in their existing home as they get older, but seniors can also take advantage of this financing option to finance a new residence.

Many of us have seen the commercials and heard the term “Reverse Mortgage”, otherwise known as Home Equity Conversion Mortgages or HECM when insured by HUD, but not sure how they work. The program is offered by HUD for those among us who are 62 years of age or older. It’s a way some homeowners can borrow against the equity in their home without having to make monthly repayments and you can borrower in several different ways. For example, you can receive a lump sum or establish a home equity line of credit and draw against the account as funds are needed.

You continue to live in your home, maintain your home and pay all the taxes, insurance and association dues until the last borrower leaves the home.

There’s a lot more caveats you need to know before you determine if a reverse mortgage is right for you, and I’ll break down your options in this post so you’ll have a good outline to work with when talking with your lender.

First and foremost a reverse mortgage should not be gone into lightly. Individuals considering a reverse mortgage not only should get all the facts from their lender, but I’d recommend discussing this option with your closest family members before making any decision.

HUD also wants you to know what is involved and requires any potential home owner considering a reverse mortgage get the facts by attending a counseling course with a HUD certified nonprofit agency, who will explain the process. As with any mortgage these reverse mortgages have pros and cons.

Let’s address some basic facts that make a reverse mortgage appealing to some.

  1. You do not make payments and the repayment terms are not required until the end of the loan term.
  2. The money you receive can be taken in different forms:
  3. It can come as an initial payment of your equity;
  4. Tenured or monthly payments that continue throughout your life or as long as you live in the home;j
  5. Term Payments – Loan terms which you and your lender agree upon;
  6. Line of Credit;
  7. Modified Term payment (a Combination of payment plan and line of credit);
  8. Modified Tenure payments (A Combination of a tenure plan and line of credit)
  9. Other options may exist;
  10. The money you receive is generally not considered taxable income, but I strongly recommend you speak with an accountant to make sure before making any decisions.
  11. You can eliminate mortgage payments by paying off your existing mortgage;
  12. Your income and credit score is not a consideration when qualifying for a reverse mortgage.

Your principal balance will be determined by a formula of your age and the market value of your home at the time you take out the HECM Reverse mortgage, if the market goes up or down your loan payoff remains the same. Beware though; there are some products that are not insured by HUD where you could be personally liable if your mortgage exceeds the then market value of your home. If you are considering a reverse mortgage, make sure it is insured by the Department of Housing and Urban Development.

Let’s discuss some of the drawbacks:

  1. The reverse mortgage is complicated and why you need to attend counseling course with a HUD certified nonprofit agency. These agencies aren’t interested in making a commission and not affiliated with the lenders. Be sure to ask all the questions you want and don’t stop asking until you feel confident you understand how the program works;
  2. They can be relatively expensive compared to other alternatives, so it’s important to compare what several reverse mortgage lenders offering both in terms and lender costs to prepare service your reverse mortgage;
  3. Most mortgage lenders only offer the reverse mortgage as an Adjustable Rate Mortgage (ARM);
  4. A reverse mortgage can affect your eligibility for public assistance benefits such as SSI; Medicaid and Medical, so get the fact directly from those agencies before proceeding with a reverse mortgage;
  5. It’s likely to reduce the equity in your home and the estate you leave to your heirs;
  6. There are many rules that accompany a Reverse Mortgage such as, you cannot rent the home or leave the home for a continued period of time or your loan may become due and payable;
  7. If you want to leave your home to your heirs, you will leave them only with the equity in your home left after paying in full the Reverse Mortgage;
  8. A spouse not on the HECM note and mortgage could have to leave the property upon the death of, or a permanent change of the legal address for the borrowing spouse.

So, how does the reverse mortgage term end? The loan term ends when the last surviving borrower dies; moves away; permanently leaves the home; or the home is sold and title to the home is transferred.

When the term ends what will be owed is the money you borrowed, the accrued interest and any financed fees, or loan costs you incurred to establish your reverse mortgage.

As individuals are living longer, we need to plan financially and see to it that there is enough cash to live comfortably in our retirement years and you don’t want to outlive your cash. As pensions get cut or removed and as other expenditures emerge, seniors are now forced to take a look at other alternatives. Some have returned to work to make ends meet, while others have cut their expenditures, and can’t enjoy their retirement. Many elderly homeowners are living with the solution that can help them fulfill their retirement years and might not even realize it, but first and foremost, be an informed consumer and seek the advice of trusted advisors like your accountant, your lawyer and your family.

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