Reverse Mortgages – Get Your Facts Right
Dangers reverse mortgages, home reverse mortgages, dangers reverse mortgages
Whatever be the purpose that you are looking for money, either for supplementing
retirement expenses, paying for health care expenses, improving your home
or paying off a current mortgage, many elderly people in of America are
resorting to what is called “Reverse mortgage”. This is a financial method
by which the senior homeowner can convert part of the equity he/she has
on his/her home into liquid cash without selling their home or be burdened
with additional monthly payments.
A typical case where a reverse mortgage will be beneficial to a senior
citizen who has retired with a large house worth some $800,000 and a comfortable
saving that would say generate an income of $10,000 per month whereas
his requirements would be around $15,000 per month. If inflation is taken
into account, after five years, his expenses would have swelled to $30,000
per month. There is no pension for the individual.
One option he has would be rent out his large house and move into a smaller
one. But as the years go on the effect of inflation will only raise the
rent and he will have to look for accommodation with lesser rent. Not
a very happy prospect for an elderly person. This is where “Reverse Mortgage”
comes to help.
When you go in for an typical mortgage, you borrow a lump sum with your
home as collateral and agree to make monthly amortized repayments to your
lender who advanced you the money. Here also, in a “reverse” mortgage,
you receive money from a lender – normally a monthly payment; but usually
you do not have to refund the money as long as you continue to live in
your home. But the loan has to be repaid in the event of your death, in
case you sell your home or it is no longer your principal place of residence.
In case of death, your heirs have to repay the loan or the bank sells
the property, realizes the loan amount and pays the heirs the excess amount,
if any. The creditor does not ask the heirs to make up the difference
in case the property is sold for an amount lesser than the loan amount.
In all other eventualities, the loan has to be settled with the bank or
the creditor. This reverse mortgage is of immense help to older people
who are house-rich but cash-poor to allow them to stay in their homes
and still meet their fiscal obligations.
To be eligible for most reverse mortgages, you have to be at least 62
years of age and reside in your own home. The money that you get from
concluding a reverse mortgage is usually tax-free and there are income
restrictions qualify for the same.
The Three Kinds of Reverse Mortgages
Basically, there are just three types of reverse mortgages.
Single Purpose Reverse Mortgage: these are offered by non-profit agencies
and by some State Government agencies; “Home Equity Conversion Mortgages(HECMs)”
which are Federally insured reverse mortgages and backed by the U.S. Department
of Housing and Urban Development; and propriety mortgages, that are private
mortgages backed by the firms that developed them.
The first of the reverse mortgages – the Single Purpose Reverse Mortgage
– usually come with low costs and are not offered in all places; also
you have to belong to the lower or middle income group to qualify for
the same.. They can also be utilized only for the purpose for which the
mortgage was applied for or specified by the Government or the non-profit
creditor. These mortgages can be used for home improvements or repairs
or to pay property taxes etc.
The second and last of the three kinds of mortgages – Home Equity Conversion
Mortgages and Propriety Mortgages tend to be more pricey and most expensive
if you intend to live in your home only for a short period of time. The
up-front cost could also be high. These mortgages are more extensively
available and can be used for any purpose – they have no income or other
restrictions.
Before applying for a Home Equity Conversion Mortgage, it is required
that you have consultations with a Counselor approved by the Department
of Housing and Urban Development for at least 45 minutes. The borrower
then obtains a “Certificate of Counseling” that is essential for the further
processing of the loan application. The Counselor has to explain all the
implications of the loan, legal and financial.
A number of factors determine the quantum of money that you can obtain
from a Home Equity Conversion Mortgage or a Proprietary Reverse Mortgage.
Some of them are your age, the place you live in, the appraised value
of your property, the kind of reverse mortgage that you select and the
current rates of interest. In the widest of terms, the older you are,
the more equity your home has and the less initial mortgage you carry
on it, the more you can get out of it.
Home Equity Conversion Mortgage gives you choices on how you get the loan.
You can go in for a fixed monthly annuity for a specified period of time
or till the event of your demise; or you can go in for a line of credit
that permits you to draw on the proceeds of the loan in amounts of your
choice at any time. You may also get a combination of both. You can also
opt for a one time lump sum amount.
In comparison with proprietary reverse mortgages, Home Equity Conversion
Mortgages provide higher loans at a lower cost. But proprietary reverse
mortgages may offer higher loans to higher valued homes. That is to say,
if you have larger appraised value on your home which carries little or
no mortgage, then you are eligible for higher funds. The appraised value
of your home depends on the age of the property, its condition and location
among other things.
Features Of A Loan
Reverse mortgage loans are not counted as income for tax purposes and
usually do not have any effect on Social Security and Medicare benefits.
You retain possession of your home and you do not have to pay any monthly
payments. The loan has to be repaid when the last surviving borrower expires
or the home is not the principal residence of the borrower. In the Home
Equity Conversion Mortgage program, the borrower can reside in a Nursing
Care Facility or other Medical facility for up to twelve months before
the loan matures.
When you consider going in for a reverse mortgage, be conscious of the
fact that:
? Creditors usually take a origination fee and closing costs. They may
also charge service fees during the term of the loan. These charges are
also set by the lender.
? Interest is applicable on the loan and it grows over time. Interest
is applied to the outstanding balance and is compounded to the principal
every month. In other words your loan amount increases in time.
? These mortgages may have fixed or variable rates of interest. Most mortgages
have variable rates of interest that are linked to the financial index
and will fluctuate according to market conditions.
? They also use up your equity on your property leaving fewer assets for
you and your family or heirs. There is a technical clause called the “non-recourse
limit” clause that is usually incorporated in all reverse mortgages that
prevents either you or your heirs from owing more that the market value
of your home when the loan is repaid. This means that if the property
is sold to repay the debt, if the value of the property is less than the
loan amount (including all interests and fees); the lender has to absorb
the difference. That is the risk that the lender takes.
? Since you hold the title to your property, you are responsible for the
payment of property taxes, insurance, fuel, maintenance, utilities and
other expenses. So, in case you default in the payment of the property
taxes or some other due, there is a possibility that the loan may become
payable.
? Interest on these mortgages do not qualify for income tax deductions
till such time as the loan is partially or totally paid off.
Getting A Good Deal
If you are thinking of going in for a reverse mortgage, look around at
all the alternatives that are on offer and the terms they are offered
on. Bone up on as much as you can on the nuances of reverse mortgaging
before you talk to your Counselor or lender. The more informed questions
you ask the more accurate the answers that you will get. This will definitely
lead to a better deal.
? You may want to look for a single-purpose, low-cost loan if you are
interested only in help to pay your property taxes, repair or improve
your home. These programs are usually known to Area Agencies on Aging
(AAAs). You can find the one nearest to you by calling the toll-free number
1-800-677-1116 or visiting the website: http://www.eldercare.gov. Ask
them for information on loans available for “property tax deferral or
postponement” or “loan programs for home repairs or improvements”.
? If you have decided to go for a Home Equity Conversion Mortgage insured
by the Federal Government, you must keep in mind that they must follow
the Department of Housing and Urban Development rules. You must also know
that many of the costs of the loan, including rates of interest, will
be the same immaterial to the lender you select. There may be differences
in the origination fee, closing costs and servicing fees.
? If you own a high-valued home, it is possible to borrow more from the
proprietary reverse mortgage lenders. But usually the cost will be on
the higher side. The best way to decide is to make an item-by-item, side-by-side
comparison between the two, comparing costs and benefits. This information
can be provided by most Home Equity Conversion Mortgage Counselors.
? Nevertheless, whatsoever be the type of reverse mortgage that you intend
to go in for, make sure that you are familiar with all the conditions
of the loan and its repayment terms. Ask the Counselor or the lender to
give details of the Total Annual Loan Cost rates – item by item. This
shows the projected average annual of the mortgage that you are interested
in.
Be A Well Informed Consumer
Be suspicious of any offer for an annuity with the suggestion that a reverse
mortgage could pay for it. If you are not able to completely understand
the commodity that is being sold or if you are not sure if you need the
product that is being sold, be even more skeptical. Here the total cost
would be the cost of the product that they are selling plus the costs
of the reverse mortgage. If it is your opinion that you need what they
are selling look around to see if you can get better offers of the same
kind.
No matter why, what or when you decide to take a reverse mortgage, you
usually have three business days to cancel the loan from the date of signing
the loan documents. If the cancellation is done within these three days,
there is no cancellation fee. The cancellation should be done in writing
and the lender must return all the money that you have so far paid for
the loan.
Reporting Possible Fraud
If, for any reason, you suspect that the law is being violated, inform
the Counselor, the lender or the loan servicer first. Then complain to
the following:
• your Banking Regulatory Agency or State Attorney General’s office, and
• the Federal Trade Commission (FTC). This can be done online at ftc.gov
or by phone, toll-free, at 1-877-FTC-HELP(1-877-382-4357).
The necessity or not of a reverse mortgage for you is a big personal question.
You may be eligible for less expensive alternatives. The following agencies
can give you more detailed information.
Reverse Mortgage Education Projects
AARP Foundation
601 E Street, NW
Washington, DC 20049
1-800-209-8085
www.aarp.org/revmort/list
U. S. Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
1-888-466-3487
www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
www.ftc.gov/bcp/menus/consumer/credit.shtm— Click on “Mortgages &
Your Home” 1-877-FTC-HELP (1-877-382-4357)
The Federal Trade Commission is there to shield the consumer from deceptive,
unfair and fraudulent business practices and to furnish the required information
for consumers to spot, avoid or stop them. Visit http://www.ftc.gov for
filing complaints and for information on consumer issues. Your complaint
is entered into a large database on the Consumer Sentinel Network for
use internally by U.S. agencies and by other international agencies.
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