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 MORTGAGES Reverse 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 you interest.
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:
- 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
- Regular monthly payments, which are the most like a regular
mortgage, but in reverse
- Lump sum payments, in which you get the total amount of
the loan at one time
However, since 2013, there have been limits on the amount that can be withdrawn in the first year of the loan.
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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