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Reverse mortgages, also known as “rising debt loans” or “forward mortgages”, were created in the 1960s by HUD and the FHA for people 62 years of age and older, and are now available from many lenders. In this period of economic uncertainty, many seniors are looking at these loans as a supplement to their retirement income. Golden Gateway Financial, a comprehensive financial source for seniors, recently reported a 90% increase in people researching reverse mortgages on their website.
Basically, these loans tap into your home’s equity. If you presently have no mortgage and have been in your home for a number of years, you will be able to receive more money than if you are still making payments and/or have not been in the home very long. If you still have a mortgage, it will have to be paid off at the closing for the reverse mortgage. The payments can be made to you: 1) monthly as long as the borrower lives in the property as their principal residence, 2) monthly for a specific period of months, 3) as a line of credit until the funds are used up, 4) a combination of the above. When the borrower no longer lives in the home, the loan becomes due for payment back to the lender. No payments are due the lender as long as the borrower lives in the home.
Costs for these loans are high. Some are paid up front at closing from the home’s equity, such as origination fees and points – these fees are usually higher on reverse mortgages. Interest then accrues over time and as the loan is paid out to the owner.
Mortgage insurance is required because, as is happening right now, home values can fall. Full repayment is due when the loan period is over, even though the home may no longer be worth the original amount. Plus, the home owner is still responsible for home insurance, any necessary repairs to the home, and property taxes.
Lenders do not make the loan for the full present value of your home. For instance, if your home is worth $200,000, the loan will only be given on 30% to 80% of its value, so you would receive between $60,000 and $160,000 over time (very few lenders will consider 80%). At this time the government limits reverse mortgages to $625,500; but this will fall to $417,000 in 2010.
These mortgages require full payment when the homeowner has been out of the home for an extended period of time. Since prolonged nursing home stays can happen to people in this age group, it is possible for them to lose their homes under these conditions. This provision varies from lender to lender and should be taken into consideration when thinking about a reverse mortgage.
A reverse mortgage could make Medicaid (not Medicare) eligibility a problem. Some states count the loan proceeds as an asset. On the other hand, a reverse mortgage could be used to spend down cash in some cases.
Before taking on a reverse mortgage, talk to an accredited counselor from HUD, the FHA, AARP or a financial planner. It is possible a traditional home equity loan will be a better choice. Also, check for community resources. Often there are local government and other neighborhood resources available for seniors to tap into.