Reverse Mortgages
Your home has financial as well as emotional value.
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If you're reluctant
to move after you retire, but find that living in your home costs more than
you can afford, you may want to look for ways to use your equity,
or ownership, as a source of occasional cash or regular income.
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A REGULAR MORTGAGE
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A
REVERSE MORTGAGE
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REVERSE MORTGAGESReverse mortgages are one way people who own their
homes may be able to tap the equity they've built up.
With a reverse mortgage, a bank or other lender sets the amount that you,
the homeowner, can borrow. But instead of repaying the lender a fixed
amount each month until the loan is paid off and you own the home -
as you would with a regular mortgage - just the opposite happens:
The lender gives you money against the equity in your home, either on
a fixed schedule over a period of years, or as you request it.
The long-term effect is the reverse of a regular mortgage, too. With a
regular mortgage, you build up your equity each time you make a payment.
But with a reverse mortgage, your loan balance increases each time the
lender gives you money. In other words, you accumulate a debit based on
the value of your home in return for cash.
Because a reverse mortgage is a loan, just the way a regular mortgage
is, the lender charges youinterest. Sooner or later
the lender will want back not only the full amount of the loan, or principal,
but also the interest that has built up on the amount you borrowed.
In most agreements, the loan amount plus interest is paid off after you
die or move out of your home, usually by selling the property. In the
meantime, however, your share of the home's value is reduced though you
continue to own it. When the house is eventually sold, the lender collects
the principal, interest, and any accumulated fees or charges that are
due on the loan. That leaves only what's left over, if anything, from
the selling price for you or your heirs. But neither you or your heirs
can ever owe more than the loan balance or the selling price of the home,
whichever is less.
ARRANGING A DEALWhen you apply for a reverse mortgage, the lender
determines how much you can borrow, the interest rate you'll pay, and
the fees to arrange the loan. The loan amount is based on three things:
the value of your house, your equity in it, and your age. Generally speaking,
the older you are, the larger the loan you qualify for.
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BORROWER BEWARE If you have used the full amount of your loan, and
there's nothing left to draw on, you face the possibility of not being
able to afford to go on living in your home. The same could happen to
your surviving spouse. One of the advantages of government-insured reverse
mortgages is that repayment is never due while you or your spouse is still
living in the house. But that doesn't solve the problem of what happens
if you are forced to move out because you're out of cash or you violate
the conditions of the loan.
And if you decide to move after you're agreed to a reverse mortgage, you'll
have to pay back all the money you've received, plus interest, closing
costs on the loan, and any other expenses. That could use up most, or
even all, of what you could sell your house for.
Despite their potential advantages, the interest rates and other expenses
on reverse mortgages have tended to be high - something you should
watch for when negotiating any agreement. It always pays to comparison
shop for the best deal. And you may want to ask your legal or financial
adviser for help, both in making the decision to borrow in this way and
choosing the loan.
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MORTGAGE TYPESIf you decide to take the reverse mortgage, you'll
begin getting your money according to the terms you agree to. There are
three different arrangements, in order of popularity:
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Lines
of credit, which let you take money from
your reverse mortgage account as you need it, usually by writing a check
against the available balance
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Regular monthly payments, which are the most like
a regular mortgage, but in reverse
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Lump sum payments, in which you get the total amount
of the loan at one time
INSURED LOANS
Some reverse mortgages are insured by the
Federal Housing Administration (FHA). They guarantee that you'll get the full amount of
the loan you've agreed to even if the lender gets into financial trouble.
However, the FHA sets a cap on the amount you can borrow based on your equity
and the housing market you live in. That amount is usually considerably
less than the actual market value of the home, because the cost of the insurance
in addition to the cost of borrowing must be covered by the loan.
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THE
SCORECARD FOR REVERSE MORTGAGES
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PLUSES |
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MINUSES |
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© 2008 by Lightbulb Press, Inc.
All Rights Reserved.
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