2005-12-29 / Savvy Senior

Savvy Senior


Can you tell me about reverse mortgages? My wife and I are looking for some different ways to help supplement our retirement and would like to learn more about how this works.

Home Owning Harvey

Dear Harvey,

Over the years, reverse mortgages have been considered loans of last resorts only for financially desperate seniors. But today, with soaring real estate prices, a growing number of retirees are turning to their homes to help fund their retirement. Here’s what you should know.

Reverse Mortgages

A reverse mortgage is a unique loan that lets older homeowners convert part of the equity in their home into cash that does not have to be paid back as long as they live there. Here are some details on how they work:

• Eligibility: To be eligible you must be at least 62-years-old, own your home or have only a small mortgage balance remaining, and be living there. Ownership: With a reverse mortgage, you, not the bank, own the house, and how you choose to use the money is entirely up to you.

• Payment Options: You can take the money either as a lump sum, a line of credit (except in Texas), regular monthly checks or a combination of these. Types of Loans: The FHA-insured home equity conversion mortgage (HECM) is by far the most popular, accounting for about 95 percent of all reverse mortgages. The other mortgage products are the Fannie Mae Home Keeper loan and the Financial Freedom Cash Account plan.

• Loan Amounts: The amount you get through a reverse mortgage depends on your age, your home’s value, the interest rates at the time the loan is granted and your county’s lending limits. Generally, the older you are, the more your house is worth, and the lower the interest rates are, the more you can borrow. Typically HECMs offer the best deals to most borrowers, but if you live in a more expensive home ($600,000 and up) you may do better with Financial Freedom. To calculate how much you can get from an 14ECM or a Fannie Mae loan visit www.reversemortgage.org. You can also get estimates at wwwfinanciaffireedom.com.

• Loan Costs: Reverse mortgages aren’t cheap. With a variety of steep up-front expenses - origination fee, mortgage insurance, appraisal fee and closing cost - your total costs will be around 6 percent of your loan amount. If you don’t plan on staying in your house for a good while, a reverse mortgage is probably not your best option.

• Repaying: You don’t have to repay the loan until you permanently move out of your house. If you own the house when you die, your heirs will have to pay off the loan, either with proceeds from selling the place or, if they want to keep it, with money from another source. You can never owe more than the value of the house.

• Counseling: Before applying for a reverse mortgage, you are required to first meet with a HUD or AARP counselor (for free), who will help you fully understand your options. To locate a HUD counselor call 800-569-4287. Or to find an AARP counselor visit www.hecmresources.org/network.cfm.

• 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.

• Lenders: Reverse mortgages are offered by both banks and mortgage lenders. Do some homework and cost comparing before you choose one. To help you for a HECM lender talk to your reverse mortgage counselor or visit www. hud.govI111codell1-pIcrit.html.

Savvy Tips: To learn more about reverse mortgages, AARP offers information online at www.aarp.org/revmort, and a free booklet called “Home Made Money - A Consumer’s Guide to Reverse Mortgages” that you can order by calling 800-209-8085. The National Reverse Mortgage Lenders Association also offers free publications at 866-264-4466.

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

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