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  • For many people, the retirement years present a financial challenge. If you are a senior and own your own home, you may be able to use the equity of your home as a source of needed cash by getting a reverse mortgage. There are restrictions, however, and the decision to take a reverse mortgage should not be made lightly.

    Reverse Mortgage Basics

    A reverse mortgage is actually a low-interest loan offered to seniors age 62 or older who own their own homes. There are three types of reverse mortgages: single-purpose reverse mortgages offered by nonprofit organizations as well as some local and state level government agencies; federally insured HECM reverse mortgages, backed by the Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, offered and backed by private companies or by Fannie Mae. Single-purpose reverse mortgages are the least expensive. However, they also have the most restrictive terms, and can only be used for the purpose for which they are approved, such as home improvement or property taxes. There are also usually income restrictions; low- and moderate-income homeowners are more likely to qualify. HECMs and proprietary mortgages are more expensive than traditional home loans, often with high upfront costs. However, they are less restrictive than single-purpose loans, and have no income ceiling. HECMs are available for many types of homes, including condos and mobile homes, provided the homeowners also own the land and the mobile home is on a permanent foundation. HECMs can also be used to purchase a home, provided enough cash is on hand to cover the balance of the price of the home. Unlike home equity loans, no payments are required for a reverse mortgage from any lender as long as the homeowners live in the home. Homeowners with a Home Equity Conversion Mortgages (HECM) loan can defer payment of the loan for up to 12 consecutive months after moving to a nursing home or other medical facility . There is no danger of the homeowners losing the home to foreclosure. Reverse mortgages are not taxable and do not affect Medicare or Social Security benefits. The homeowner retains the title to the home. The homeowners must pay property taxes, utilities and other maintenance costs. The amount of the loan increases over time, and the interest rates are often tied to a financial index, which means they may fluctuate according to market conditions. Interest payments are not tax deductible until the loan is completely paid off. Once the homeowners either move out of the home or die, the loan must be paid by the heirs or the estate. If the reverse mortgage is not paid, then the home goes into foreclosure. However, any equity which remains in the home is passed along to the estate or the heirs, regardless of the final disposition of the reverse mortgage. . The actual amount of the loan depends on the value of the home, interest rates, age of the homeowner and the type of reverse loan selected. In general, the older the homeowner, the more valuable the home and the less owed on the home, the larger the maximum reverse mortgage will be.

    Obtaining a Reverse Mortgage

    Homeowners seeking an HECM must first meet with an independent government-approved housing counseling agency. This is also required by some private companies. Most counselors charge a fee which can be deducted from the loan. Homeowners cannot be turned away because they cannot afford the fee. Fees associated with the loan include origination fees, mortgage insurance premiums (for HECMs) and other closing costs. Some lenders may charge fees for servicing the loan. With private lenders, these fees may vary; with HECMs the amount of the fees is dictated by law. Term loans pay a fixed amount each month for a specific length of time. Tenure loans pay a fixed amount for the entire time the homeowners live in the home. A line of credit provides funds for the homeowner to draw from in varying amounts until it has been exhausted. Homeowners can also opt for a combination of a term or tenure loan and a line of credit. Payment options can be changed at any time for a small fee.

    Source:

    Federal Trade Commission: Reverse Mortgages: Get the Facts Before Cashing in on Your Home's Equity

    HUD: Home Equity Conversion Mortgages for Seniors

    AARP: Reverse Mortgage Basics

    Resource:

    AARP: Reverse Mortgages

    ReverseMortageGuides.org: What Is a Reverse Mortgage?

    HUD: Home Equity Conversion Mortgages Housing Counselor Roster

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