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Reverse Mortgages in Demand – Could One Be Right for You?

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You may have heard talk about reverse mortgages, but what are they and could one be right for you? A reverse mortgage, also known as a home equity conversion, is a loan against the value of your home. Instead of getting a loan to help you pay for your home, a reverse mortgage pays you based on the value of your home and other factors.

As the credit crisis has continued, more and more seniors have turned to reverse mortgages to tap home equity and, in some cases, to prevent foreclosure. The Federal Housing Administration approved 115,176 loans in 2008, up 6.4% from 2007.

Homeowners at least 62 years old are eligible for a reverse mortgage. Additionally, the home you are borrowing against must be your principal place of residence and you will be required to own your home outright or have only a small balance remaining on your current mortgage. If you still owe on your current mortgage, the first monies you receive from a reverse mortgage will go to pay off any remaining debt. As with a traditional mortgage, you will be required to pay your property taxes and maintain the property.

The benefit of a reverse mortgage is that it pays you cash – either in a lump sum, monthly payments, or a line of credit. Monthly payments may be for a specific term or for as long as you own your home. And best of all, the funds paid to you from the reverse mortgage are not considered income for tax purposes.

There are many different types of reverse mortgage programs. The amount you can borrow is based on your age, the appraised value of your home, and the interest rate. Typically, the older you are or the greater the value of your home, the more cash you are eligible to receive.

How is the loan repaid? The mortgage will be repaid when you sell your home, either because you move or because you die. Some reverse mortgages allow you to continue to receive payments as long as you live, regardless of whether you still live in your home. The amount you have received in payment, plus accrued interest, will be what you owe when the loan is due. The safety net is that you can never owe more than your home is worth at the time of repayment.

Applying for the reverse mortgage will include some costs: an appraisal and a credit report. Usually interest charges, origination fees, title searches, etc., are paid for with the initial payment from the loan.

Similar to an APR, a TALC, or Total Annual Loan Cost, will give you an idea of the total cost of the loan. It should be the number you consider when comparing different reverse mortgage programs. Keep in mind that Federal Truth-in-Lending law only requires lenders to show you a loan’s TALC rate after you have applied for the loan, but not before you’ve applied.

When considering a reverse mortgage, look at how much money you need, how long you anticipate needing it, and what type of payments you require. Put together a list of lenders who offer a reverse mortgage by looking at banks, mortgage companies, credit unions, and government programs, such as Fannie Mae and Home Equity Conversion Mortgage programs through HUD. Just as with shopping for a traditional mortgage, contact several lenders and be prepared with your list of questions. Lastly, make sure the loan is insured. Therefore, ensuring that you will continue to receive payments and remain in your home as long as you live, even if the amount borrowed exceeds the value of your home.

Be careful to consider all the options available to you with a reverse mortgage. You may want to consider consumer counseling or talking with an attorney or tax professional to determine if a reverse mortgage is the right way for you to maximize your assets.

 


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