5 Questions to Ask Before Considering a Reverse Mortgage

1. Do you really need a reverse mortgage? Why are you interested in these loans? What would you do with the money you would get from one? Are the needs you intend to meet really worth the high total cost of these loans?
2. Can you afford a reverse mortgage? These loans are very expensive, and the amount you owe grows larger every month.
3. Can you afford to start using up your home equity now? The more you use now, the less you will have later when you may need it more, for example, to pay for future emergencies, health care needs, or everyday living expenses.
4. Do you have less costly options? Do you have other financial resources that you could use instead of taking out a loan?
5. Do you fully understand how these loans work? Reverse mortgages are quite different from any other loans, and the risks to borrowers are unique. Before considering one, you need to do your homework carefully and thoroughly.

False Advertising & Unsuspecting Seniors

False advertising, while not new, is cropping up often enough in direct mail pieces to prospective reverse mortgage customers that public and private authorities are expressing concern. Often appearing as if it is coming from an official (i.e. government) source, the appeals offer to help unsuspecting recipients - usually seniors - take the necessary and proper steps to obtain this specialty financial product. "It is a source of concern," says Peter Bell, president of the National Reverse Mortgage Lenders Association, who notes that the mailings "are not coming from lenders, but lead generation companies that don't understand the product." He adds that the most common mailings "are impersonations of government agencies which are not stating that HECM/reverse mortgages are a loan program."

PROS & CONS OF REVERSE MORTGAGES

These loans come with onerous expenses, but they do have some redeeming value. Read about the pros and cons, and check out the link provided below.

1. You can choose how to receive the money: fixed monthly payment, lump sum, line of credit or some combination of these options.

2. Income from reverse mortgage generally does not affect Social Security or Medicare benefits.

3. Debt isn't passed on to heirs. Loan balance is deducted from proceeds of home sale.

4. If you "outlive the loan," meaning you receive more in payments than your home is worth, you will never owe more than the value of the home, according to the Federal Trade Commission, or FTC.

5. Loan advances are generally not taxable.

6. Most loans do not have income requirements.

7. Homeowner retains title to home.

8. No payments are due until last surviving borrower dies, sells the home or no longer lives in home as primary residence.

9. HECM programs allow borrower to live in nursing home or other medical facility for up to 12 months before loan becomes due.

10. After the home is sold and the loan and fees are paid to the lender, any remaining equity in the home belongs to you or your heirs.

The downsides of reverse mortgages

1. Reverse mortgage proceeds could impact Medicaid eligibility.

2. Borrowers must be at least 62 years old to qualify.

3. Lenders generally charge origination fees and other closing costs that are usually steep.

4. Lenders require free debt counseling prior to loan application.

5. Lenders may charge servicing fees during term of the mortgage.

6. Debt increases over time as interest is charged to outstanding balance of loan.

7. Most loans have variable interest rates tied to short-term indexes, such as the one-year Treasury bill or LIBOR.

8. As home equity is used up, fewer assets are available to leave to heirs.

9. Interest is not tax deductible until the loan is paid off.

10. Borrowers are responsible for paying taxes, homeowners insurance, maintenance costs and other expenses. If they don't, the loan may become due.

DO YOUR HOMEWORK. Determine what type of reverse mortgage you might need. Do you need a one-time payment to help pay for home improvements or property taxes? Consider a single-purpose reverse mortgage. Call the Area Agencies on Aging to explore this option at 1-800-677-1116. Ask for information about loan programs for home repairs or improvements or for property tax postponement. To find an agency near you, visit www.eldercare.gov. Do you need money for another purpose altogether? Do as much homework as possible before contacting an HECM or proprietary lender.
Complete Article

REVERSE MORTGAGES - LOAN TYPES & COSTS

The most well-known and widely available reverse mortgage is the federally-insured Home Equity Conversion Mortgage (HECM). This loan is backed by the U. S. Department of Housing and Urban Development (HUD) and can be used for any purpose. It is generally offered by mortgage companies or banks.

Some state and local governments offer low-cost reverse mortgages that generally must be used for one specific purpose only, for example, to make home repairs or pay property taxes. Many of these "public sector" loan programs are only available to homeowners with low or moderate incomes.

"Proprietary" reverse mortgages are owned and backed by the private companies that develop them. These loans can be used for any purpose and are generally the most expensive type of reverse mortgage.

Loan costs can vary by a lot from one type of reverse mortgage to another. Not all reverse mortgages include the same types of loan costs. As a result, the true total cost of reverse mortgages can be difficult to understand and compare. This is the reason federal Truth-in-Lending law requires lenders to disclose a "Total Annual Loan Cost" for these loans.
AARP Loan Types article

REVERSE MORTGAGE - HOW THEY WORK

With a reverse mortgage, homeowners borrow part of the equity they have in their property. The principal and accrued interest are repaid only after they die or move out. Over time the owner's equity diminishes while the amount of the loan increases-the opposite of a traditional mortgage. Unless you fall behind on taxes or allow the house to slip into disrepair, the lender can't foreclose on the property, even if you live many years beyond expectations and the size of the debt surpasses the value of the house itself. In most cases, the proceeds of a reverse mortgage can be taken in a lump sum, an open line of credit, or as monthly payments.

Though reverse mortgages have been available for more than 25 years, they've become more widespread recently. In fiscal 2007, the Department of Housing and Urban Development insured upward of 100,000 reverse mortgages, compared with less than 7,000 in 2000. HUD, through its many authorized lenders, is by far the largest reverse-mortgage provider, with almost 90 percent of the market.

Moreover, as average life expectancy continues to rise, older folks need more money than before to get through their retirement years. They may be less concerned about passing on large sums to their children, who are often middle-aged and financially settled by the time of their parents' deaths.

How They Work - Comsumers Report