Magazine article The Exceptional Parent

Reverse Mortgages: The Good, the Bad, and the Ugly

Magazine article The Exceptional Parent

Reverse Mortgages: The Good, the Bad, and the Ugly

Article excerpt

For those who have special needs, or are caregivers for an individual with special needs, the promise of extra cash flow from a reverse mortgage may seem like a wonderful gift; however, be sure to read the fine print.

Reverse mortgages are a complex and often misunderstood product. Although they have been around for decades, reverse mortgages have recently received more attention as a financial planning vehicle as people are living longer and have insufficient assets and retirement income to maintain their lifestyles and pay for needed expenses. For many seniors, the "golden years" have been tarnished by the economic downturn, ill-timed sales of depressed stocks, the current low-interest rate environment, and the sky-rocketing costs of health and long-term care for themselves and their loved ones. For those who have special needs, or are caregivers for an individual with special needs, the promise of extra cash flow from a reverse mortgage may seem like a wonderful gift; however, be sure to read the fine print. In this article, we hope to shed some light on reverse mortgages that will help you make the right decision for you and your family.

WHAT IS A REVERSE MORTGAGE

A reverse mortgage is a loan that a person age 62 or older, who owns their home outright or has paid down a considerable amount of debt on the home, may take out from a bank using the equity that they have accrued in their home as collateral. If the reverse mortgage applicant does not own their home completely free of debt, they may still qualify for the loan provided that they use a portion of the proceeds of the reverse mortgage to pay off the outstanding debt on the home. In order to qualify for a reverse mortgage, you must occupy the home as your principal residence.

A reverse mortgage allows you to convert part of the equity in your home into cash without having to sell the house. This means that you will receive money from the bank, either monthly, as a lump sum, or as a line of credit. With each payment you receive from the reverse mortgage, the bank is entitled to repayment of more money from you or your estate once the loan becomes due. With a conventional mortgage, you make monthly payments to the bank. In a reverse mortgage, you receive money from the bank and don't have to pay it back until you no longer live in the home. The amount of the loan you are able to obtain depends on a number of factors, including the age of the youngest borrower or non-borrowing spouse, the value of the home, the applicable interest rate, government lending limits and the mortgage insurance premium. Most, but not all, reverse mortgages are federally insured and are backed by the U.S. Department of Housing and Urban Development (HUD). For these types of loans (which will be the focus of this article), the borrower must meet with a counselor who explains the different types of reverse mortgages and how they work.

Be aware that the upfront or closing costs for a reverse mortgage can be significant; these include obtaining a third party appraisal, title search, origination fees or points, and other costs. Also, the interest rate is typically higher than it would be for a traditional home equity loan and most reverse mortgages are variable rate loans (this means that your interest rate may go up or down during the term of the loan, depending on market conditions). It is also important to note that the interest on a reverse mortgage is compounded, meaning that the borrower pays interest on the interest. This means that the amount of the loan may end up being far more than the home's value at the time that the loan is due. Moreover, the interest will not be tax-deductible each year since you are not actually paying it, it is simply accruing. Thus, if you are planning to stay in your home for only a short time, a reverse mortgage might not be the best option for you.

All borrowers must now undergo a financial assessment prior to obtaining a reverse mortgage. …

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