Many
Americans struggle to make ends meet during their retirement. A third of all
retirees now get ninety percent (or more) of their income from Social Security.
For those who are fortunate enough to own their homes, a reverse mortgage can
be an option that can supplement Social Security and other income sources.
With a conventional mortgage,
the homeowner makes a monthly payment to the lender. After
each payment, the homeowner's equity increases by the amount of the principal
included in the payment. Reverse mortgages get their name from the fact that the
stream of payments goes the opposite direction from what homeowners are used
to. Rather than making monthly payments to a bank, the lender sends the money
back to the homeowner.
o
It
matters who's listed on the reverse mortgage:
Recently, many families have gotten into trouble with reverse mortgages
because they listed only one owner as the borrower. The benefit of doing so is
that choosing the older member of a couple can boost your monthly payment or
allowable loan amount.
The much larger problem is that the guarantee that you'll
be allowed to remain in your home as long as it's your primary residence
extends only to named borrowers, not to spouses or family members. As a result,
in situations in which the named borrower has died or entered a long-term care
facility, lenders have foreclosed on surviving spouses who weren't listed on
the reverse mortgage.
o
Reverse
mortgages only offer a portion of your home equity:
Reverse mortgages don't give you access to the full equity you have in your
home. The Federal Housing Administration (FHA) calculates the maximum mortgage
amount based on the age of the youngest borrower, current interest rates, and
the appraised value of your home.
You also have to pay the costs of a reverse mortgage, which includes mortgage insurance premiums, third-party lender charges, and origination and servicing fees. Many lenders will work those costs into the loan amount they make available to you, reducing your net proceeds even further.
Reverse mortgages
postpone payment of the loan until a homeowner’s death, selling, or move from
the home. Because there are no required mortgage payments on a reverse
mortgage, the interest is
added to the loan balance each month.
Before deciding what’s right for you, understand the
entire process. Here is the information that’s imperative to understand about
all that’s involved with a
reverse mortgage.
o
Reverse
mortgages have different payout options: Reverse
mortgages offer a variety of different options for you to tap your home equity.
The Federal Housing Administration offers reverse mortgages with five different
payment plans. One option involves taking equal monthly payments that run as
long as one borrower remains alive, and lives in the home as a principal
residence.
You can also choose a fixed term of years, after which
time you'll stop receiving monthly payments even if you're still living in the
home. A flexible line of credit is also available, giving you the option of
choosing how much, and when to take money out, (up to the maximum amount of the
line).
In addition to those three options, you can combine lines
of credit with the first two monthly-payment options. These two hybrid options allow you to use a
portion of the available funding for a line of credit and receiving the rest
through either of the two monthly-payment options.
o
There
are disreputable lenders out there: Weak property values
and increasing complaints about reverse mortgages have led to many lenders
choosing to stop making the loans available. Bank of America (BAC),
Wells Fargo (WFC),
and MetLife (MET)
have all exited the market in recent years, and smaller mortgage brokers and
lenders have taken their place.
While some of those smaller lenders are reputable, others
can push you into loans that make it difficult for the borrower to even afford
the maintenance and other costs they're required to pay under a reverse
mortgage.
o
You
can lose your home with a reverse mortgage:
Many aggressive reverse-mortgage lenders falsely state that retirees can't lose
their homes with a reverse mortgage. While reverse mortgages do offer some
protection to homeowners, they still require you to keep up your end of the
bargain, and there are dire
consequences if you don't. Among the responsibilities of
reverse-mortgage borrowers include paying for utilities, homeowners insurance,
flood insurance, and real-estate taxes.
Most lenders will keep a close eye on whether you keep up
with those responsibilities, and if you don't, the lender can take action on
the loan, with options that include foreclosure. The FHA has seen up to seventy
percent of borrowers take out large lump sums in recent years rather than using
the monthly payment option. Those retirees can quickly use up the money, and
find themselves unable to handle the costs of keeping up their home.
“As the United States has become an older
nation, reverse mortgages have grown into a $20-billion-a-year industry, with
elderly homeowners taking out more than 132,000 such loans in 2007, an increase
of more than 270 percent from two years earlier.” (Charles
Duhigg) [i]
[i] Sources used:
·
“5 Must-Know Facts about Reverse
Mortgages” by Dan Caplinger
·
“Reverse Mortgage” from
Wikipedia
Inspired by "Better Call Jackson "on NBC4
Inspired by "Better Call Jackson "on NBC4
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