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The Pros and Cons of Reverse Mortgages

Having the facts about Reverse Mortgages in Kansas City is key!

What they want you to hear

“Are you short on cash? Do you own your home? Come in today and let us show you how you can make money each month while keeping your house!”

This is the kind of pitch that pulls many older adults into a reverse mortgage.

The result

In a standard mortgage, as a homeowner you make a monthly amortized payment to the lender. After each payment your equity increases, and eventually the mortgage may be paid in full, releasing it from the lender. However, after living in their homes for decades, many older Americans are now turning to reverse mortgages.

Types of Reverse Mortgages

There are three types of reverse mortgage. First is the single-purpose reverse mortgage. As the name implies, the monies may only be used for one reason, such as to pay for home repairs. Second is the federally insured reverse mortgage. Although usually backed by the U.S. Department of Housing and Urban Development, these mortgages tend to be more expensive than other home loans, making them a poor option for those who are staying in their homes for a short period. Finally is the priority reverse mortgage, which is backed by private lenders.

How a Reverse Mortgage Works

In a reverse mortgage, you make no payments and all of the interest is added to the lien on the property. In essence, with a reverse mortgage you can turn the value of your home into cash without having to move or repay the loan each month. The idea of being able to receive a supplemental check when living on a fixed income can be very alluring. In fact, you have five options as to how you receive the cash from your reverse mortgage:

* Tenure. Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

* Term. Equal monthly payments for a fixed number of months selected.

* Line of credit. Unscheduled payments or installments, at times and in amounts of borrower’s choosing, until the line of credit is exhausted.

* Modified tenure. Combination of line of credit and monthly payments for as long as the borrower remains in the home.

* Modified term. Combination of line of credit and monthly payments for a fixed number of months selected by the borrower.

Pros & Cons of Reverse Mortgages

A reverse mortgage may allow older homeowners to convert part of the equity in their home into cash without having to sell the home or take on additional monthly bills. But be aware that at some point, the lender comes knocking. Although the money you receive will generally not have to be paid back as long as you live in your home, your loan must be repaid after you die, sell your home, or no longer live there as your principal residence.

These are important issues to consider, as many seniors intend to pass their estate to their family or need to leave their home as they age. However, when the home is sold or you no longer use it for your primary residence, you or your estate must repay the cash received from the reverse mortgage, plus interest and other fees. The remaining equity in the home, if any, belongs to you or your heirs.

How to Qualify for a Reverse Mortgage

To qualify for a reverse mortgage, you must be at least 62 years old and possess a single-family home, condominium, or townhouse. The home that will be used for the mortgage must be owned free and clear or have a very small remaining balance that can be paid off with the reverse mortgage.

The amount you may borrow depends on several factors, including your age, interest rates, and the home’s value. Generally, the more valuable your home is, the older you are, and the lower the interest, the more you may borrow. Keep in mind that for all reverse mortgages you will face high upfront costs, origination fees, title insurance, appraisal charges, mortgage insurance, attorney fees, and other closing costs.

On a positive note, reverse mortgages are generally non-taxable and usually do not affect Social Security or Medicare benefits. However, if you receive Medicaid, SSI, or other public benefits, these loan advances will be counted as “liquid assets” if the money is kept in your account past the end of the calendar month in which it is received. As a result, if your total liquid assets are greater than those programs allow, you could lose eligibility and assistance from these public programs.

Options Beyond Reverse Mortgage

Due to the pitfalls of reverse mortgages, some seniors are looking into other options. For example, a home equity line of credit with interest-only payments or an intra-family loan may allow you to pay a higher interest rate while avoiding high upfront costs. Of course, the aspects of any loan you consider should be described in full by your financial lender.

Eventually, after weighing all options, you may find a loan that is a perfect fit—or you may simply decide that it is time to sell your home and enjoy a change of scenery.

To obtain a free copy of “Home Made Money: A Consumer’s Guide to Reverse Mortgages,” call 800-209-8085 or visit AARP for additional information.

Malissa L. Walden, Esq @ 2007

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