I fully realize if it sounds too good to be true, it probably is and There Ain't No Such Thing As A Free Lunch (TANSTAAFL) immediately jumped into your head when you read the title of this article. However, if you are 62 or over, you may have just found the goose that laid the golden egg.
A reverse mortgage is exactly what the name implies. Rather than you paying a monthly sum of money to a mortgage company, a mortgage company pays you. There are three types of reverse mortgages and all have the same eligibility requirements.
You must be at least 62, live in, and own, your home and sign a contract. You must also have equity in your home and the inherent interest rate is based on what the lender is currently charging (more about this later) on non-reverse mortgages. The lender, by the way, will also have your property appraised for which you may or may not be charged.
There are no income restrictions such as those imposed by Social Security and most are tax free since they do not involve additional features such as an attached annuity. They also do not affect your social security benefits nor your Medicare entitlements.
This article discusses only those mortgages without additional features. Should you wish to know more about reverse mortgages with additional features, consult with a competent tax professional to reduce the chances of running afoul of tax laws.
The FTC's website, http://www.ftc.gov/bcp/online/pubs/homes/rms.htm has an excellent article on reverse mortgages but it also does not discuss mortgages with additional features. Another reason to consult with a tax professional.
This tool called reverse mortgage is actually a loan, hence an interest rate, which allows senior citizens, or as some say, the elderly, to convert part of their equity into cash without having to sell their home. Because it is a loan "in reverse" you are receiving a monthly sum and not paying a monthly amount while you live in your home.
However, this loan must be repaid and repaid with interest should you sell, die, no longer live their as your principal residence or reach the end of the pre-selected loan period. You remain responsible to pay real estate taxes, insurance and all attendant maintenance expenses which, of course, you would have to pay with, or without, a reverse mortgage.
With this explanation, the picture becomes more focused, right? You enjoy a monthly sum, tax free and non-repayable until a date sometime in the future, while remaining in your home. As close to a win-win situation as one can get in this day and age.
It doesn't take a rocket scientist to realize anyone who is cash poor but house rich should at least investigate this tool. However, like any other instrument involving your signature on the dotted line involving financial obligation, you must have some preliminary information.
I mentioned there are three types of reverse mortgages. The first is the single purpose reverse mortgage. These are offered by some sate and local government agencies and nonprofit organizations.
They may not be available in your area. Call your county's Department of Senior Services. Their phone number is in the white pages under the listing for your county.
Single purpose means exactly that. The proceeds may be used for only the purpose specified by the lender and generally are only made to people with low or moderate incomes. If you call your county, be sure to ask if their reverse mortgage is a single purpose and what are the limits.
The second type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM). The federal government insures these mortgages and they are backed by the Department of Housing and Urban Development (HUD). The up front costs are generally high especially if you plan on staying in your home for a short period of time but they carry no income or medical restrictions and can be used for any purpose.
HECMs also require all applicants to meet with a counselor from an independent government approved housing counseling agency. The FTC says, "The counselor must explain the loan's costs, financial implications, and alternatives. For example, counselors should tell you about government or nonprofit programs for which you may qualify, and any single-purpose or proprietary reverse mortgages available in your area."
An additional benefit of an HECM mortgage is the nursing home clause. Should a borrower have to move out of her home and into a nursing home or other medical facility, she has up to 12 months before the loan becomes due. This enhances financial planning.
The third type is called a proprietary reverse mortgage. These are private loans backed by the companies offering them. In other words, they are NOT government insured. Like HECMs, the upfront cost could be high for a proprietary reverse mortgage.
A reverse mortgage, cost wise, is like a non-reverse mortgage. The lender usually charges loan origination fees, closing costs, insurance premiums (for insured loans) and service fees which are all set by the lender.
Fortunately, like non-reverse mortgages, the federal Truth In Lending Act (TILA) applies to reverse mortgages. This means the lender MUST disclose the costs and terms of the reverse mortgage you are considering.
The annual percentage rate (APR) and payment terms must be prominently displayed and not in the fine print. If you choose a credit line as your loan, lenders must tell you the charges related to not only opening but using this credit account.
Another word about the interest rate since it too mirrors the non-reverse mortgage. Just as with a non-reverse mortgage, an interest rate can be fixed or variable with variable rates tied to a financial index. This means the rate will change as the index changes.
TILA forces the lender to disclose this information. TILA does not force the lender to tell you the reverse mortgage may, or may not, use up all of your equity. If a "non-recourse" clause is included in the contract, and most have them, you must be told you will not owe more than the value of your home when the loan is repaid. This is a good thing.
Of the three, the HECM is the most flexible. It lets you select the way you receive your money. For example, you can receive fixed monthly cash advances for a specified period or for as long as you live in your home. Or, if you choose, you can receive a line of credit.
A line of credit allows you to draw on the loan proceeds when you want and how much you want. The HECM allows a combination of the two choices. You can receive a monthly payment plus a line of credit.
The key is to read and understand every clause in the contract before signing and do not be afraid to ask questions about what you don't understand. Don't let a huge monthly payment cloud your judgment and decision making ability.
Both HUD and the FTC have toll free numbers and websites to help you in making an informed decision. HUD can be called at 1-888-466-3487 with their web address at: http://www.hud.gov/offices/hsg/sfh/hecm/rmtopen.cfm while the FTC can be called at 1-877-382-4357 with their web address at: http://www.ftc.gov/credit
After reading the above information you may have decided the goose with the golden eggs is really a vulture waiting to pounce on your carcass. Or, you may have decided the goose's eggs are worth your time and attention. Either way, you are now a more informed consumer.
Tom Koziol is the Executive Secretary for Senior Outreach Ministries. Visit http://www.senior2senior.org and download their free senior caregiver manual.
Home loans may seem like a bad idea for people... Read More
How To Release Equity Locked Up In Your Home For... Read More
An offset mortgage is very similar to a current account... Read More
Have your home's appreciation grow twice as fast.For Seniors over... Read More
Do you know what it takes to qualify for mortgage... Read More
Are you one of the millions of Americans who will... Read More
Many people choose to take out home improvement loans so... Read More
Being a creature of habit can cost you plenty when... Read More
Refinancing your mortgage after bankruptcy is actually the same as... Read More
It is a curious fact of human nature that people... Read More
Tracing back, the concept of reverse mortgages began when one... Read More
Refinancing your house's mortgage is not the same thing as... Read More
The home equity loan has become quite popular in the... Read More
This post is a must read for anyone considering purchasing... Read More
A mortgage is borrowing money using property as a security,... Read More
If you're actively looking for cheap homeowner loans, there are... Read More
When financing a home purchase, the kind of mortgage you... Read More
I have a lot of friends and family who are... Read More
Sub-prime mortgages are not that much different from average mortgages.... Read More
Financial difficulties are married to bad credit. It is a... Read More
When looking at tips for first time home buyers, you've... Read More
Many people fret the rising tide of interest rates. You'll... Read More
Homes that have been foreclosed can be one of the... Read More
Before I go further, let me ask a question- if... Read More
The recent boom in house price values have made some... Read More
We all know that there are a lot of mortgage... Read More
We live in a society where people are losing their... Read More
A mortgage lead is an exciting thing because you are... Read More
Shopping online for mortgages ought to be trouble free, even... Read More
About 29% of current homeowners and a much larger percent... Read More
Your equity is the amount your home is worth, on... Read More
In today's overheated housing market, lenders are making it easier... Read More
While only comprising about 1% of all mortgages, the reverse... Read More
Using a home equity loan to get out of debt... Read More
Here is a useful guide to remortgages. What is a... Read More
With so many lenders out there, it can be hard... Read More
With the growing interest in real estate purchasing and speculation,... Read More
The booming real estate market has allowed many Americans to... Read More
Finding a good lender to help you with refinancing your... Read More
Whether you are planning to purchase a home for the... Read More
Looking for home mortgage loans can get confusing with the... Read More
Interest rates on home mortgages are often quoted with and... Read More
You're selling your home and are looking to relocate to... Read More
Here is a useful flexible mortgage guide. Flexible mortgages are... Read More
So, your bank had just turned you down for a... Read More
A Bridging Loan is a short-term loan used as a... Read More
It is a common financial scenario across households in the... Read More
With escrow accounts the money for your home insurance and... Read More
Maybe you've heard the expert advice that your debt to... Read More
The prospect of mortgage debt elimination is something that many... Read More
"How much should you borrow?" is a question people with... Read More
You should say goodbye to PMI. You may not notice... Read More
Property website Rightmove has released its latest house price index... Read More
Home ownership has risen sharply in recent years, and the... Read More
A home equity loan is a loan that is guaranteed... Read More
Rising home prices, particularly on the East and West coasts... Read More
It takes a mighty big effort to secure a home... Read More
Reverse mortgages used to be considered the last resort of... Read More
If a mortgage could be paid off in five years... Read More
Doesn't Residential mortgage give the impression that they are a... Read More
Here is a useful guide to the different types of... Read More
The most common reason most people refinance is to save... Read More
Here is a useful guide to the different types of... Read More
Getting on top of your mortgage so you can pay... Read More
If you are a homebuyer, there are a few points... Read More
You might be wanting to look into bad credit home... Read More
Mortgage Refinance |