REVERSE MORTGAGES

A reverse mortgage is one in which the homeowner essentially sells part of the equity in the home in order to get cash, without having to sell the home or pay for a home equity loan.

The difference between a regular mortgage and a reverse mortgage is that, instead of making mortgage payments every month, the mortgage lender sends you money every month. You don't have to pay the money back for as long as you live in your home.

Of course, the loan must be repaid at some point: when you die, when you sell the house, or when you no longer live in the house as your principal residence.

Reverse mortgages can be a viable way for those who have a lot of equity in their homes, but don't have a lot in the way of income. The money you receive from a reverse mortgage each month is usually not taxable.

Most reverse mortgages require that you be at least 62 years of age, and live in the home.

Types of reverse mortgages:

There are three types of reverse mortgages: single purpose reverse mortgages; federally-insured reverse mortgages; and private reverse mortgages.

A single-purpose reverse mortgage can only be used for one purpose specified by the government or a non profit lender. Examples of legitimate purposes are home repairs, home improvements, or property taxes. Single-purpose reverse mortgages have very low costs associated with them. However, they are generally available only to those with low or moderate incomes.

Federally-insured reverse mortgages are called Home Equity Conversion Mortgages (HECM's). They are backed by the U.S. Department of Housing and Urban Development. (HUD). HECM's have high up-front costs, so they are best suited for those who intend to stay in their homes as long as possible.

To qualify for an HECM, you must first meet with a counselor from a housing counselling agency approved by the government. The counselor will explain the costs, the financial implications, and the alternatives that you have to a reverse mortgage.

How much money can you get from an HECM? That depends upon your age, the type of reverse mortgage you choose, the value of your home, current interest rates, and other factors. Generally speaking, the older you are, and having a lot of equity means you'll get more from an HECM.

If you qualify for an HECM, you can select several ways to receive the money from the reverse mortgage. You can choose to be paid a fixed amount every month over a specified period of time, or for as long as you live in your home. You can also choose a line of credit, from which you can draw funds from the loan proceeds at any time, and in whatever amounts you choose.

Private reverse mortgages are similar in most respects to HECM's. The difference is that you're borrowing money from a private lender, and the costs will likely be higher than HECM's, which are government-funded. However, those who own higher-valued homes may find that they will qualify more easily for a reverse mortgage going through a private lender, and may also get more money from the reverse mortgage than if they went with an HECM.

Features of Reverse Mortgages:

The loan payments you receive from a reverse mortgage are not regarded as taxable income, so they do not affect your Social Security or Medicare benefits. While a reverse mortgage means that you are borrowing against your home, you still hold the title to the home.

Because you retain the title to your home, you're still responsible for repairs, property taxes, utilities, and other expenses, just as you would be with a conventional mortgage.

Just as with a conventional mortgage, reverse mortgages involve closing costs. It's to your advantage to shop around for the best deal on a reverse mortgage.

A reverse mortgage means just what the term suggests: instead of the amount of money you owe on your home declining over time, the amount of money you owe on your home increases over time.

How much can the amount you owe increase to? A "nonrecourse" clause is contained in nearly every reverse mortgage. The clause prevents you or your estate from owing more than what your home is worth when the loan is repaid.

One obvious disadvantage of a reverse mortgage is that, in the end, you are left with no equity in your home. You won't have anything from your home to pass on to your heirs, or to use if you should go into a retirement home or assisted living.