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Reverse Mortgages

Robert Wagner, the heartthrob actor from the 60s, is on television promoting reverse mortgages. Surely, he does not need one. The question is, "Who does?"
 
Reverse mortgages present a fair deal to many, but not all seniors, who have purchased their homes and now are in financial circumstances where they need more income. While the laws governing reverse mortgages have greatly improved such mortgages, seniors still need to be very careful before deciding to take a reverse mortgage.
 
The Pros
 
A reverse mortgage is a loan to the homeowner by a bank or other lending institution. The bank or lending institution pays off any existing mortgage and makes the rest of the funds available to the homeowner. The bank or lending institution does not get title to the house.  Upon the death of the homeowner, the loan must be repaid. This is typically done by selling the home. The loan is paid off and the remainder, if any, is available for distribution as part of the homeowner's estate. 
 
In most situations, the amount of principal accessible to the homeowners is paid to the homeowner in monthly installments, giving the homeowner extra funds to meet his or her monthly needs. Other ways in which the reverse mortgage can provide funds include: (1) a lump sum payment, (2) a line of credit, (3) a partial lump sum payment and the remainder in monthly installments, or (4) any combination chosen by the homeowner. The income is not taxable and will not affect the amount of the homeowner's Social Security benefit. The money can be used for any purpose . The homeowner can use the funds to take a trip or pay for needed medical care.
 
The Cons
 
The reverse mortgage is a loan, which must be repaid. The loan, as all loans do, requires the payment of interest, and the interest may be adjusted on a monthly or yearly basis.  The younger a homeowner is when he or she takes a reverse mortgage, the more it will cost in terms of principle and interest to pay it off when the homeowner sells, dies, or otherwise vacates the home. There are substantial upfront fees associated with the reverse mortgage. These fees are commonly deducted from the principal of the loan at the time the mortgage is taken and start accruing interest costs immediately. In taking the mortgage in monthly installments, the amount each month will not vary, unless the homeowner refinances the reverse mortgage, incurring new upfront fees. When the cost of living goes up, the monthly installments will not increase.
 
Types of Reverse Mortgages
 
The most popular reverse mortgage is the Home Equity Conversion Mortgage, backed by the Federal Housing Administration (FHA). An HECM guarantees that payments will continue as long as the homeowner ( or the survivor of them if a husband and wife take the loan) remains alive and in the house. For this guarantee, the homeowner will pay a premium equal to 2 percent of the maximum a homeowner may borrow, plus a .5 percent annual premium. The HECM also limits to 2 percent of the maximum claim the amount that the lender can charge as a loan initiation fee. This is in addition to any closing costs.. It is also in addition to the interest on the loan and monthly service fees. The maximum amount of the HECM loan is under $375,000.
 
Other mortgages are proprietary mortgages, available through Fannie Mae and private lending institutions. Fannie Mae is not a lender, but helps make loans available through its Home Keeper program. The program provides reverse mortgages for condos and for people wanting to use a reverse mortgage to purchase a new house. The amount of interest is adjusted on a monthly basis and can increase by as much as 12 percent. The maximum amount of a loan under the House Keeper program was $417,000 in 2006.
 
Conventional reverse mortgages from private vendors are also available.   These mortgages have no limit on either the value of the house or the amount of the loan. Like all mortgages, the amount any particular lender will loan a homeowner depends on the value of the home and the age of the homeowner.
 
Who Should Take a Reverse Mortgage
 
A reverse mortgage, with its high upfront costs, is not for everyone. An unmarried homeowner, with no children, who has immediate unmet health needs or inadequate monthly income to buy medicine and put food on the table is a prime candidate. The parent, who wants to leave something to her children and just wants a few extra dollars for a pair of diamond earrings or a trip to Disneyland, should ask herself whether it is worth it. 
 
The ideal customer for a reverse mortgage is someone who purchased the house years before, probably owes nothing or very little on the purchase mortgage and any equity line of credit, has seen a great increase in the value of the house since the time of purchase, and has immediate needs.  The homeowner, who bought the house 30 years ago for $25,000, who owes nothing on it, and is over the age of 75, may be just the type of customer the reverse mortgage was designed to help. If the house is now worth $175,000 and the homeowner needs more income to meet his or her monthly expenses or needs $30,000 for an operation, the reverse mortgage may be a good option.
 
Each person should look at the high upfront costs and ask whether the price is really worth it before deciding to take a reverse mortgage. The homeowner should then explore many options before settling on which loan to take.