2008-08-20 / Seniors

Understanding Reverse Mortgages

Dear Savvy Senior,

Can you tell me about reverse mortgages? My wife and I are both in our 70s and are interested in learning more about this option.

Homebody Bob

Dear Bob:

Over the years reverse mortgages have been considered loans of last resorts, only for financially desperate seniors. Not any more! The reverse mortgage industry is booming, helping retirees from all walks of life use their homes to help fund their retirements.

The Basics

A reverse mortgage is a unique loan that lets older homeowners convert part of the equity in their home into tax-free income that doesn't have to be paid back as long as they live there. Who's eligible? How much can be borrowed? What does it cost? And is this right for you? Here are the key points on how a reverse mortgage works and where you can find help.

Eligibility. To be eligible you must be at least 62 years old, own your own home and currently be living there. There is no income qualification. Even if you have an existing mortgage, you're still eligible, but you must be able to get enough from the reverse mortgage to pay it off.

Ownership. With a reverse mortgage, you, not the bank, own the house, so you are still responsible for property taxes, insurance and repairs. How you choose to spend the money from the loan is up to you.

Types of loans. There are two basic types of reverse mortgages, the FHA insured, Home Equity Conversion Mortgage (HECM) which accounts for about 90 percent of all reverse mortgages on the market (HECMs limit how much of the home's value you can tap, currently ranging from $200,160 to $362,790) and conventional reverse mortgages, also known as jumbo loans, which are better suited for seniors with homes valued at more than $400,000 because they offer larger loan amounts.

Loan costs. The main drawback of reverse mortgages is the hefty up-front fees - a 2 percent lender origination fee, 2 percent mortgage insurance, along with appraisal fee, closing costs and other miscellaneous expenses. All told, the cost of getting a HECM can run around 5 percent of the value of your home. Conventional reverse mortgages are generally more expensive. (Note: Most up-front fees can be added to the loan balance, so you'll have no out-of-pocket cost at closing.)

Loan amounts. The amount you get through a reverse mortgage depends on your age, your home's value, where you live and the current interest rates. Generally, the older you are, the more your house is worth and the lower the interest rates are, the more you can borrow. To calculate how much you may be able to borrow with a HECM, visit www.rmaarp.com. You can calculate conventional reverse mortgages on the Web sites of the financial institutions you're considering.

Payment options. You can receive the money from a reverse mortgage in a lump sum payment, a line of credit, regular monthly checks or a combination of these.

Loan repayment. A reverse mortgage does not have to be repaid until you or the last surviving borrower permanently moves out of the home or dies. Then you or your heirs will have to pay off the loan (which includes the money you actually borrowed plus accrued interest and fees), either with the proceeds from selling the place, or, if the heirs want to keep it, with money from another source. You or your heirs will never owe more than the value of the house.

Counseling. Before applying for a reverse mortgage, you are required first to meet with an independent counselor who will spell out the pros and cons as well as the alternatives (the service is free). To find one in your area, call the AARP Reverse Mortgage Education Program (800-209- 8085), the National Foundation for Credit Counseling (866-698-6322) or Money Management International (877-908- 2227).

Tax-free. The money you get from a reverse mortgage is tax-free and won't affect your Social Security or Medicare benefits, but it may affect eligibility for certain kinds of government assistance, such as SSI and Medicaid. Be sure you check.

Reverse lenders. Reverse mortgages are offered by both banks and mortgage lenders. To help to choose one, talk to your reverse mortgage counselor or visit www.reversemortgage.org.

Savvy Tip: To learn more about reverse mortgages, visit www.aarp.org/revmort, or call 800-209-8085 and order their free booklet, "Home Made Money."

Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit www.savvysenior.org. Jim Miller is a contributor to "The NBC Today Show" and author of The Savvy Senior books.

The Gazette does not endorse the contents of The Savvy Senior. Check with professionals about the contents of this column.

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