Reverse Mortgages are Becoming a Major Source of Retirement Income
There are well over 100,000 active reverse mortgages in the U.SS. today and that number increases every year, along with the average age of the American homeowner. Reverse mortgages have been around since the late 1980s, so while many still ask, " What are they?" more and more ask, " Are they for me?"
For those still asking " what are they?" the answer is: it's a mortgage that lets homeowners who are 62 or older borrow money against the equity in their paid-for home. The owner can choose to receive the money as a lump sum, a line of credit, annual payments or any combination of these. The loan does not have to be repaid until the homeowner or, in the case of a married couple, the last homeowner leaves the residence. When the loan comes due, the lender sells the house to repay it. If the value of the house does not cover the total amount owed, the lender has to absorb the loss and cannot ask the heirs to make up the difference. If the heirs want to keep the home, they have the option of repaying the loan.Those wondering, " Is a reverse mortgage for me?" may find it helps to weigh the pros and cons. People who've paid their mortgage in full, or only have a small balance remaining, can, after age 62, collect on it, and can do so without having to move. We'll look at how much can be borrowed, later. There are three major points to remember. First, if you thought getting a regular mortgage was confusing, wait until you try getting a reverse. Bronwyn Belling, a reverse mortgage specialist for the AARP Foundation in Washington, D.C., says the process is so complicated and fraught with potential problems that anyone wanting a reverse mortgage backed by the Department of Housing and Urban Renewal (HUD) must go through a free loan-counseling program first. HUD backs 90 percent of reverse mortgages, she adds. Other lenders often require loan counseling or education programs, as well. If you find a lender who doesn't require outside, free counseling you should find one who does. The second point is that when it is time to repay the loan, usually at death, the lender will sell the house, take what is owed and turn any excess money over to the heirs. Heirs can, however, pay the bank off directly and keep the house themselves. Third, the loan is expensive. Belling says it can cost as much as 6 percent (sometimes more) of the total value of the home: a 2 percent loan origination fee, 2 percent for mortgage insurance, and roughly another 2 percent for closing costs. All of this is paid up-front and added to the amount " borrowed." Belling says one of the most important questions AARP counselors ask is how long the borrowers can reasonably expect to stay in the home. The longer they stay, the less expensive the cost of the loan when it is spread out over time. You can find out how much you can borrow by going to http://www.aarp.org/revmort/--AARP's reverse mortgage calculator. Plug in your age, home value and zip code to get a rough idea of how much you can get from both a HUD-backed Home Equity Conversion Mortgage and a private reverse mortgage. It compares all the options—lump sum, line-of-credit and annuity. The older you are and the more your home is worth, the more you can borrow. AARP counselors also provide " free objective information about reverse mortgages, as well as about less costly alternatives." Belling says a good source of information is http://www.reverse.org/, which is maintained by the not-for-profit National Center for Home Equity Conversion. " Many people who think they want a reverse mortgage find out in counseling there is a better way to solve their financial problems. Some come because they need money for medicine, utility bills, home repairs or other expenses." In many cases, she adds, there are federal, state, local or privately funded programs to help them. " Many states have little-known property tax relief programs for seniors. We help them find programs they might not be aware of." In many cases the senior ends up getting a reverse mortgage as well as other help. Belling gives four reasons for the growing interest in reverse mortgages. " Interest rates are low, and that works in the consumer's favor. He or she can borrow more. Secondly, in many areas around the country real estate values are holding their own or appreciating tremendously. Third, there is a lot more public awareness about them. Fourth is the economy. Many people who thought they were ready for retirement are not. The economy and stock market events have weakened their financial standing. They have been forced to look at their options. " Using the equity in their home is often the most attractive option," she adds. If you refinance the house, you have to make monthly mortgage payments. It's the same with a home equity loan. With a reverse mortgage all you have to do is pay the property taxes and insurance and keep up the house and the property so their value will be maintained. Belling explains that people who take out a reverse mortgage choose the " line of credit option because it allows borrowers the most flexibility. It lets them borrow what they need when they need it, and it can be left alone when they don't. The downside is that some people don't manage large sums of money well. Also, they can be taken advantage of by a predatory lender, home repairman or insurance salesperson. People need to do their homework before they make a decision, and they should know what they will do with the money before they get it." Is a reverse mortgage for you? Talk it over with your family and a reverse mortgage counselor. In fact, you might want to ask a family member or friend to attend counseling sessions with you. The money is there. It is yours. You have a right to it. It will have to be paid back, and your home is what guarantees it. The real question is: Do you want it?
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