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Reverse Mortgages

        Reverse Mortgages       

Looking for a way to improve your lifestyle during retirement?  If you're "house rich," but "cash poor," a reverse mortgage may be the answer.  They are similar to traditional mortgages, except that the lender pays you each month.  Reverse mortgages became extremely popular during the 90's, but they are not without some risk.

How They  Work

Basically, a reverse mortgage allows people aged 62 and over to borrow money against the equity in their homes.  The money can be used for anything the borrower chooses to use it for and there is typically no repayment of the loan as long as you continue to live in the home.  

If you're "house rich," but "cash poor," a reverse mortgage may be the answer.

 

The loan is repaid when the homeowner dies or moves.  Any remaining equity in the home (after the repayment of the loan) goes to the former homeowner or his estate.

Obviously, to qualify for a reverse mortgage, you must own your home and you will continue to be responsible for property taxes and general upkeep.  The amount you are eligible to borrow is generally based on your age, the interest rate and the amount of equity in your home and it must be repaid, with interest, when you sell or move from the home, die or reach the end of the loan term (depending upon what type of plan you choose).  

The lender will not take title to your home and you are entitled to live in your home even after you have exhausted your equity.  Some programs even guarantee monthly payments for life.

Since you are merely receiving a loan each month, the proceeds are nontaxable and they will not affect your Social Security or Medicare benefits.  Furthermore, the interest that is accruing on your mortgage is not deductible until you pay off the debt.

The amount you may borrow will vary based on your age.  The loans may go as high as 50 to 75% of the home's fair market value and are based on life expectancy tables, so you are generally allowed to borrow more if you are older.  

Types Of Reverse Mortgages

There are three basic types of reverse mortgages:  FHA insured, lender insured and uninsured.  Using the FHA insured plan, you can take monthly loan advances, a line of credit or monthly loan advances plus a line of credit for as long as you live in the home.  There will be closing costs and a mortgage insurance premium you will have to pay. 

An FHA insured reverse mortgage provides you with a guarantee that loan advances will continue even if the lender defaults.  However, with an FHA insured mortgage, your loan costs may be higher and your loan advances may be smaller than with other plans.

A lender insured reverse mortgage is similar to an FHA insured plan, but the loan advances may be larger and you may also be allowed to mortgage less than the full value of your home which will preserve some equity for you or your estate.  Some plans also include an annuity that will continue to make monthly payments to you even if you sell your home or move.

Uninsured plans provide monthly advances for a fixed term only.  When the loan advances expire, the total loan balance becomes due.  No mortgage insurance premium is required with an uninsured plan.  These types of plans are generally used when someone has short-term cash needs.

Disadvantages Of A Reverse Mortgage

Obviously, the biggest downside to a reverse mortgage is that it uses up possibly your most valuable asset - the equity in your home.  That means there will be less for you to leave your heirs.  Reverse mortgages can also have high up-front costs and monthly insurance premiums and since the unpaid interest is added to your loan balance each month, the total interest you owe will increase significantly over time.

You may also feel "locked into" your home.  If a sibling or other relative becomes ill and you want to move to another city to be closer, your reverse mortgage will typically have to be terminated and repaid.  Reverse mortgages also will often carry adjustable interest rates.  

If the public index rises significantly in the future, you may find your equity being used up at a much faster pace than you anticipated.  Fixed rate reverse mortgages are available, but will usually involve some trade-offs you may not be willing to make.

Please give us a call if you are considering a reverse mortgage.  As you can see, there are many options to consider and there are other alternatives not mentioned in this article that we can discuss.  We can help you review your present situation and come up with a plan that should be right for you.

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