Reverse Mortgages Provide More Options for Seniors This Year

Reverse mortgages have long served as financial lifelines for seniors who needed a financial cushion. Now with higher lending limits and new rules that let borrowers use the loan proceeds to buy homes, reverse mortgages provide even greater financial options for seniors.

Reverse Mortgage: How it Works

Most reverse mortgages are insured by the Federal Housing Administration and are known as Home Equity Conversion Mortgages (HECMs). These loans let you borrow against the equity in your home, and, unlike traditional mortgages, they don't require you to repay a penny until the house is sold. You can take the money as a lump sum, in monthly installments, or as a credit line.

Using a Reverse Mortgage to Buy a Home

Before this year, you could not use a reverse mortgage to buy a new home. If you wanted to downsize and didn't have the credit rating or income to qualify for a traditional mortgage, you had to sell your old home and pay cash for the new one--often tying up all of your money. If you sold a house in Minnesota worth $400,000 and you wanted to buy a $300,000 house in Arizona--and couldn't take out a traditional mortgage--you had to pay cash and only got to keep $100,000 of the proceeds from the sale. But new rules that took effect in January allow seniors to use a reverse mortgage to buy a new home. You can actually buy the new house with a reverse mortgage, keep more cash for yourself, and have no mortgage payment. So if you took a $100,000 reverse mortgage on the Arizona house, you'd have $200,000 of the proceeds to use as you please.

Higher Lending Limits

You can also borrow more with an HECM than ever before. Congress raised the lending limit on reverse mortgages to $625,500 through the end of this year as part of the economic stimulus plan. Next year the limit will revert to $417,000.

Throwing it in Reverse: Who's Eligible?

You must be at least 62 and own your home outright or have a very 16pxmortgage balance, which can be paid off with some of the reverse mortgage proceeds.

Reverse mortgages are complicated, and you should research other alternatives, such as refinancing your mortgage or getting a home equity loan, and evaluate the costs and benefits of each. Use a loan comparison calculator to compare mortgages if you're thinking about refinancing or get free quotes from lenders to refinance or for a home equity loan. AARP offers a reverse mortgage calculator that lets you figure how much you can get from a reverse mortgage.

Posted By :
Barbara Marquand is a freelance writer who writes frequently on mortgage and personal finance topics.

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