Reverse Mortgages - Leaping Ahead or Stepping Backwards ? … by neil smith

12/12/07

This information about reverse mortgages was researched from the website of the Federal Trade Commission. http://www.ftc.gov

Seniors over the age 62 are taking out “Reverse Mortgages” in increasing numbers these days to pay for healthcare, home improvements or to supplement income without increasing monthly bills or having to sell their homes.

In a “Reverse Mortgage” you receive money from a lender in exchange for portions of your home’s equity. You are not required to pay this money back as long as you are living in your home. This money is usually only paid back to the lender when you either:

* Sell your home
* Cease living in the home as your principle place of residence
* Cease living.

The income from a Reverse Mortgage is tax-free and usually comes with no restrictions on your income. Usually, the more valuable your home, the less you owe on it, and the older you are, the more money you can get.

There Are Three Kinds of Reverse Mortgages:

* Single-Purpose Reverse Mortgage
Offered by some nonprofit organizations as well as some local and state governments. This type of reverse mortgage is usually only available to people with lower income levels and can only be used for a single, specified purpose (taxes, home repairs / improvements, etc.)

* Proprietary Reverse Mortgage
This is a loan that is privately held and backed solely by the companies that develop them. This type of reverse mortgage may yield the largest loan advances if you own a home with a high-appraised value.

* Home Equity Conversion Mortgage
This one is backed by the United States Department of Housing and Urban Development and is federally insured with no income requirements, but often comes with steep upfront costs and is usually a fairly expensive option in general, although not usually as costly as a Proprietary Reverse Mortgage. It can however, be used for any purpose. Read on for more information about this particular type of reverse mortgage…

The Home Equity Conversion Mortage (or HECM) requires a meeting with a counselor from a government-approved independent housing counseling agency who will explain alternatives to this type of reverse mortgage as well as the loan’s financial implications and costs.

A HECM provides different options on how you receive the payments. You can have a line of credit which allows you to draw from the loan’s proceeds in any amount you wish and at any time you wish. Alternatively, you may select to have fixed monthly payments made to you for as long as you live in your home. Or you can get a combination of the two aforementioned options.

The Pretty Side of A Reverse Mortgage

Most Reverse Mortgages include a “nonrecourse” clause which is a safeguard preventing your estate or you from owing more than the home’s value when the loan has been repaid.

The Ugly Side of A Reverse Mortgage

* A Reverse Mortgage’s interest is not tax-deductible until the loan is paid off in part or whole.

* A Reverse Mortgage will use up your home’s equity either partially or wholly, meaning there will be less to pass on to your heirs if there is anything at all.

* As with most home loans, a Reverse Mortgage will usually come with origination fees and closing costs. Some lenders even charge “servicing fees” during the term of the loan.

* Reverse Mortgages can have either variable rates tied to a financial index, or fixed rates. Variable rates may increase or decrease according to market conditions. Variable rates have caused much pain to the unsuspecting homeowner in our current housing market, so borrower beware on this one. A fixed rate is usually the safer bet.

* A Reverse Mortgage may become due and payable should you default on your homeowner’s insurance or fail to pay property taxes.

* The amount you owe on a Reverse Mortgage compounds and grows exponentially over time, meaning that as your debt increases, so does the amount which the interest is charged on. Benjamin Franklin once stated that Compound Interest was the 8th wonder of the world. In this case, the only thing you are likely to wonder is where all your assets have disappeared to!

Be “In the Know” Before You Dip In Your Toe!

* KNOW all terms and conditions that could cause the loan to promptly become due and payable. Learn as much as you can about Reverse Mortgages before speaking with a lender or counselor. You could get a better deal simply by asking more informed questions.

* KNOW the projected annual average cost of the Reverse Mortgage (including itemized costs) by asking your lender or counselor to explain the Total Annual Loan Cost (TALC) rates.

* KNOW if you qualify for any single-purpose, low-cost loan programs in your area if considering for the purposes of help with property taxes or home repairs. A good source for information on these types of programs are AAAs, or “Area Agencies on Aging.” To find an agency near you, call toll-free 1 (800) 677-1116 or visit www.eldercare.gov online and ask about property tax deferral, property tax postponement or loan programs for home repairs or improvements.

* KNOW that origination fees, closing costs and servicing fees can vary from lender-to-lender. Shop around for the best deal.

Just Say NO!

Sometimes a lender will try to sell you something you may not need, like an annuity, suggesting that a reverse mortgage may be an easy way to finance it. If you are not sure you need it or don’t fully understand what they are selling, it is usually best to be skeptical. If you think you may possibly need what the lender is trying to sell you, break away, do some research and if you feel you can use the item or service being offered, shop around for the best deal.

Great Resources For Researching Reverse Mortgages:

U. S. Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
1 (888) 466-3487
www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm

Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
ftc.gov/bcp/conline/edcams/credit/ — Click on “Mortgages & Your Home” 1 (877) FTC-HELP (1-877-382-4357)

AARP Foundation
601 E Street, NW
Washington, DC 20049
1-800-209-8085
www.aarp.org/revmort/list

Reporting Fraud

If you suspect that anyone is violating the law, let the loan servicer, lender or counselor know.

You should then file a complaint with The Federal Trade Commission (FTC). toll-free, at 1 (877) FTC-HELP (1-877-382-4357) or online at ftc.gov as well as your state banking regulatory agency or state Attorney General’s Office.

Please visit my flagship website at http://www.letsgetahead.com for more great articles like this one!

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