- Reverse Mortgage - Rev Dan Catt
Offered through the department of Housing and Urban Development's (HUD) Home Equity Conversion Mortgage program (HECM), reverse mortgages were introduced by the government in the 1960's. Though they have not been wildly accepted by the public, their numbers have continued to grow over the years, gaining popularity in areas such as Denver, Phoenix, Florida and California, locales with higher populations of senior citizens. The National Reverse Mortgage Lender's Association (NRMLA) reports recently that the number of federally-insured reverse mortgages offered through HUD rose 77% in one federal fiscal year.
Proponents of reverse mortgages say that these kinds of loans are an available source of cash for seniors on fixed incomes, giving borrowers the ability to use their homes as an investment. But like any investment, especially one that impacts an individual with limited earning potential, all aspects of the reverse mortgage must be taken into careful consideration before knowing whether or not it is the right choice.
What is a Reverse Mortgage?
A reverse mortgage is a specialized loan insured through HUD that caters to senior citizens 62 years of age and older. It allows the homeowner to convert the equity in their home to cash, which can be accessed as one lump payout at closing, monthly income to the borrower, or a combination of both. How much cash one receives depends on a variety of factors such as the borrower's age, the current interest rate, and the lesser of either the appraised value of the home or the HECM FHA mortgage limits.
The borrower must meet certain conditions, such as owning the property, either outright or having only a small mortgage balance, occupying the property as a principal residence, and having no delinquencies on a federal debt. The owner retains the title, and a lien is placed on the property, as is with a regular mortgage, which is paid off when the home is sold or the occupant no longer lives in the property.
Are Reverse Mortgages Right for Everyone?
Deciding whether or not a reverse mortgage is right will depend upon many factors. Typically, a reverse mortgage will not be advantageous if the borrower is seeking only a short-term loan. If, however, a homeowner's intentions are to occupy the property for a long period of time while never desiring to make another loan payment for the remainder of his life, then a reverse mortgage may be a viable option. Advocates say that these loans are better for the elderly than a typical 30-year fixed mortgage because older people can find it more difficult to qualify for these typical mortgages, oftentimes having limited income while no longer working.
Opponents of the reverse mortgage would like the homeowner to consider other aspects of these loans. Upfront costs associated with reverse mortgages are usually high; in addition, borrowers will still be responsible for real estate taxes, conventional homeowner's insurance and home repairs. Borrowers will also have to pay for mortgage insurance, as these loans are federally-funded and backed by the government, which is a requirement for all federal loans.
The proceeds from a reverse mortgage could negatively impact a homeowner's ability to qualify for Medicaid, as the funds received from the equity conversion is viewed as an asset. Borrowers must also occupy the property, but if a homeowner becomes ill and must vacate the property to spend a prolonged period of time in a nursing home, for example, some reverse mortgages may require repayment of the loan in full, in addition to accrued interest.
Watch out for Reverse Mortgage Scams
Seniors need to be wary of predatory lenders while seeking a reverse mortgage. Some loan agents will use high-pressured sales tactics and may often try to manipulate a homeowner into a loan hidden with other costs rolled in, such as insurance or other products.
The most common type of fraud experienced by homeowners is perpetuated by companies calling themselves estate planners who will ask the homeowner to pay a fee to be provided information about reverse mortgages and lenders who offer them. Lenders who offer reverse mortgages, however, must be appoved by HUD through their Home Equity Conversion Mortgage program and information is provided free, along with counseling agencies offered throughout the country.
As with any other major investment or purchase, senior citizens must carefully research all aspects of the reverse mortgage in deciding whether or not it is an appropriate alternative for them. Advice on reverse mortgages is offered through HUD-approved counseling agencies.
Sources:
Moore, Carole, Pros and Cons of Reverse Mortgages, Bankrate.com (Accessed 19 Mar 2010)
U.S. Department of Housing and Urban Development, Washington, D.C., (Accessed 19 Mar 2010)
United Southwest Mortgage Corporation Inc. dba All Reverse Mortgage Company, FHA-approved, copyright 2004-2010 (Accessed 19 Mar 2010)
1995-2009 MortgageLoan.com (Accessed 19 Mar 2010)
Valerie Williams - Valerie Williams resides in the Metro-Atlanta area. She earned a Bachelor of Arts degree in Organizational Management, and has spent much ...
