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Reverse Mortgage: Education Is the Answer

Sam and Pam Smith own their home outright, free and clear, the mortgage is all paid off and that feels amazing. They live in Pennsylvania while their two grown children and seven growing grandchildren live in sunny San Diego. Both Sam and Pam receive Social Security, totaling $2,198 per month, and Sam gets a pension for $567 per month. It's more than enough to live on but not enough to visit San Diego as frequently as they'd like.They'd also like to buy a jacuzzi for the deck area.

Sam and Pam are thinking about taking out a reverse mortgage, but are unsure if it's a good idea. They've heard good things about reverse mortgages but they've also heard horror stories. Is a reverse mortgage right for Sam and Pam Smith?

Matter of fact, while we're at it--is a reverse mortgage right for you?

First Things First: What Exactly Is a Reverse Mortgage?

There are a few different reverse mortgage products, but all work basically the same way.

A reverse mortgage, also called a home equity conversion mortgage (HECM), is a home loan that you don't have to pay back, and you can still live in the house. The lender gets paid back after you move, sell the home, or die, when the house is either sold to pay the debt or your heirs pay the debt and keep the house. You can take a reverse mortgage proceeds as a lump sum, a monthly payment, a line of credit, or some combination of the three. To be eligible for a reverse mortgage, you must be age 62 or older, and own your home or have a lot of equity.

Perhaps the most vital fact to understand about reverse mortgage basics is that, no matter what particular product you choose, a reverse mortgage is not free money. It's a mortgage, complete with an interest rate, closing costs, and, in most cases, a mortgage broker or mortgage company that helps you go through the process.

A Great Deal for Some People, But Be Careful and Be Educated

A reverse mortgage, also called a reverse home loan, is not a scam. It is, however, a product that only works for some people. A reverse mortgage might well be a good decision for you, provided you fully understand the potential downsides of the deal.

These potential downsides include:

-- You're incurring debt and paying interest.

-- You're reducing your home equity over time.

-- Some people get excited when they receive a large amount of money and spend it unwisely.

-- Reverse mortgages can be expensive in terms of closing costs.

-- Your heirs may not be able to retain the property after your death.

Look these potential downsides directly in the face before committing to anything.

After You've Asked Questions, Ask More Questions. Here are Five Good Ones

1) How much money do you need? Taking a reverse mortgage out to fix up the porch is not a good idea. The costs are too high for such a small amount, especially when home equity loans cost so little to originate.

2) What are you going to use the money for? If you need a reverse mortgage to pay for living expenses because your other income isn't cutting it, you're getting into the territory where a reverse mortgage might be right for you. After all, if you're living like a pauper with a paid off house, what fun is life?

3) Have you evaluated your other options? Federal and state assistance programs are available to help you pay your property taxes if that's your problem. Look into them. What about a home equity line of credit at a low interest rate? See what a home equity loan would cost you by using our loan calculator. Compare the costs of an HECM with those of selling the home and downsizing. Remember the real estate commissions, moving, closing costs, etc. can be substantial. Plus you have less house to enjoy. An HECM can save you money and let you avoid the hassles of moving.

4) How is your health? Check reverse mortgage documents carefully. All require that you occupy the home. You don't want to emerge from a long stint in a hospital or nursing home to find your home in foreclosure. Or have to sell your beloved two story home if you can't get around in it anymore and have to repay the HECM.

5) What about travel plans? HECM fees are paid upfront, therefore you get more benefit for those fees the longer you keep your loan. If you expect to spend the proceeds on a two year jaunt around the world, an HECM is not the loan for you. You'll have to repay the loan as soon as you stop occupying your house.

Reverse Mortgages Growing In Popularity, and not Without Reason

April 2009 saw the highest volume of HECM reverse mortgage loans in the history of this product, at 11,660. In 2008, 112,154 HECMs were funded. In 2007, there were 107,558. In 2006, 76,351.

In other words, reverse mortgages are becoming a more popular choice for seniors who want to turn their home equity into cash. And, from all indications, this trend seems likely to continue.

Of course, in the end, only Sam and Pam Smith can answer the question of whether a reverse mortgage is right for them. And only you can answer the question for your situation.



Posted By :
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.


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