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How to determine if a Reverse Mortgage is right for you

Posted by  on Apr 16, 2009
 
A reverse mortgage sounds as if it might just be too good to be true — instead of you making monthly payments, the lender makes payments to you. A reverse mortgage is similar to a home equity loan, in that it allows older homeowners — 62 or over — to use some of the equity in their home as tax free income. There are some unique features and it is important to remember that a reverse mortgage may not work for everyone.

An estimated 13 million seniors are actually qualified to take out a reverse mortgage and around 100,000 of those do take advantage of the program in a typical year. That number is expected to grow over the next few years as more “baby boomers” reach the age of 62 and become qualified for the program.

Any homeowner over 62 can potentially qualify for a reverse mortgage — there are no particular requirements concerning income or health. The amount you can receive is based upon the equity in your home, so the more your home is worth, and the less you owe on your mortgage — the more you can borrow. You don’t need an income to qualify for a reverse mortgage.

You generally receive your money by regular monthly payments from the lender or finance company, or you can choose to access your funds as an open line of credit. The major advantage of a reverse mortgage is that the money does not have to be repaid until the homeowner moves, sells their home or dies. In the event of your death, the loan is repaid from the estate.

There are certain other conditions — your home must have no other outstanding liens against it. Any current debts secured against your home must be paid before you take out a reverse mortgage, or in some cases, with the money you obtain from taking out the reverse mortgage loan.

And if you own more than one home — a reverse mortgage can only be applied to your primary residence. It’s usually possible to take out a reverse mortgage if you live in an apartment, manufactured home or planned unit development — but not if you live in a mobile home or cooperative.

Reverse mortgages also guarantee that a homeowner will stay in his or her home for as long as they live. This applies even if the outstanding amount of the loan — as well as the interest — eventually exceeds the value of the property. Another big advantage of taking out a reverse mortgage - a lender cannot force a homeowner to sell their property in order to pay back the loan.

Many older homeowners are also looking for peace of mind as well as financial stability and a reverse mortgage offers just that. It gives you the option of having funds available should you need them — and it’s an effective way to cover the expense of such potentially costly things as long term care or estate planning.

If you are thinking of taking out a reverse mortgage, be sure to get professional and legal advice before you make any decision. You may want to discuss it with other family members as well. A reverse mortgage isn’t ideal for every homeowner and there are some situations in which you may not benefit from one.

A reverse mortgage probably isn’t the best option for you if you are intending to sell your home and move within a few years, due to the upfront costs you will incur. In some ways, a reverse mortgage can be seen as spending money that would normally go to your heirs after your death.

If you intend to leave your home to your children or other family members, a reverse mortgage generally isn’t the best option. If you do this, your home may have to be sold to a third party in order to pay back the amount of the loan. Other options, such as a more conventional home equity loan or a grant may be better alternatives. If you have no plans to leave your home to your children to inherit — a reverse mortgage may be a good option for you.

The fees and charges associated with a reverse mortgage are often high — although the fees can be paid back as part of the loan amount, rather than paid upfront. Typically, the costs are significantly higher than those that come with a conventional mortgage. For those who qualify, the Department of Housing and Urban Development offers a reverse mortgage with lower costs.

A reverse mortgage may not be right for everyone — but for older people who want to stay in their home and could not otherwise afford to do so, it may be an ideal solution.

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