Saturday, February 28, 2009

Reverse Mortgages

Reverse mortgages come in many different forms. You should only seek out an FHA-insured Home Equity Conversion Mortgage.

These are the things that you need to know about a reverse mortgage:

How they work
How to qualify
The involvement of the Federal Government
Consumer Safeguards
Other pertinent facts

How they work

A reverse mortgage was created by the Federal Government for homeowners age 62 and over and could be considered as a financial empowerment tool. It allows you to convert a portion of your equity into tax-free cash to supplement your monthly income without incurring a monthly loan payment. Yet you still own your home and your name still stays on title.

You are still responsible for the property taxes, homeowner’s insurance and the general maintenance and upkeep of the property.

The entire loan is repaid when the home is sold or the last remaining homeowner passes away or permanently leaves the home.

As stated earlier, the proceeds of the loan are tax-free and do not affect any Social Security or Medicare payments you may be receiving. They, however, could affect Medicaid payments.
You are able to use the proceeds of the loan for any purpose, including:

Home improvements
Long Term Care planning
Debt consolidation

What is the difference between a Home Equity loan or Line-of-Credit and a Reverse Mortgage?

The answer is the in the case of a reverse mortgage you can access the equity in your home without having a monthly payment, which you would incur if you simply refinanced your home or took out a line-of-credit on the property.

How to qualify

It is surprising how simple the qualification process is for a reverse mortgage. It is a very straight forward process:

Everyone on the title to the property must be 62 years old or older
You must live in a 1-4 family residence, condo or co-op
You must be the principal resident and cannot be renting out the property.

That’s it. There are NO income qualifications. This is because you do not make payments on a reverse mortgage.

The amount of money you will receive as a result of a reverse mortgage is based on:

Your age
Your home value
The location of the home
The prevailing interest rate

You must pay of all existing mortgages when you close on a reverse mortgage, which means that you will have no monthly payment.

Payout Options

You can access the proceeds of a reverse mortgage in several different ways:

LUMP SUM-you receive all of the cash at once
CREDIT LINE-You take the money when you need it. You accrue interest only on the amount that you withdraw.
MONTHLY PAYMENTS-which can come in two ways
The term payout option-which enables you to receive a fixed amount of money for a fixed amount of time
The tenure payment option-which enables you to receive a fixed amount of money for as long as you live
You can also combine any of the above options to best fit your individual needs.
And after the reverse mortgage is paid off, the remaining equity in your home goes to your estate.

Government Involvement and Consumer Safeguards

Federal requires that you have a counseling session with an FHA approved individual counselor before submitting any reverse mortgage application to any mortgage company. The counselor will review your loan options and explore any alternatives that may be available to you. This session can be either face-to-face or over the phone.

Other Pertinent Facts

The closing costs associated with a reverse mortgage are similar to the closing costs for a refinance or home equity line-of-credit.

Due to the ‘Non-recourse’ feature of a reverse mortgage, you can NEVER owe more than the house is worth.

Because there are no payments to the mortgage company, you can never lose your home, so long as you continue to pay the property taxes, insurance and maintain the home.

You have the ability to sell the home at any time

A reverse mortgage is also an excellent way to fund long-term care, whether you wish to self-fund for such costs or are looking to fund a long-term care insurance policy.

Overall, a reverse mortgage could be a great option for senior citizens in these difficult economic times. As with any financial decision, however, you should seek out thr advice of a competent financial professional who is familiar with your individual situation and personal needs.

Mark A. Bowman

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