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Wednesday, December 2, 2015

Reverse Mortgages

Trust us!
     If you live in the US you have no doubt seen spokesmen Henry Winkler and Robert Wagner hawking reverse mortgages. 
     And then there was the sleazy ad with former presidential candidate, the late Fred Thompson, trying to get old people to take out an absolutely free government-backed reverse mortgage. Good old Fred wouldn't have lied would he? Let's see...the company Fred represented, American Advisors Group, was sued by the Illinois Attorney General back in 2010 for using unfair and deceptive marketing practices to solicit seniors for reverse mortgages. According to the Attorney General they used extremely misleading language in their advertising, sometimes even disguising their loans as government benefits that borrowers didn't have to repay! The ads were so slick that many consumers actually thought they were getting in on a government program that offered free money and didn't even know these offers were for a reverse mortgage. Hint: look for the government to do a lot TO you, but little or nothing FOR you and you won't go far wrong. 
     A reverse mortgage is a type of home loan that lets you convert a portion of the equity in your home into cash. Your equity can be paid out monthly for a fixed period of time until you die, or as a lump sum, or you can access it on an as-needed basis via a line of credit.
      Basically, the idea is people over 62 can tap into equity on their house and get a long-term loan to pay for stuff and then just leave their children to sell off the homes at higher prices after they die. Assuming, of course, things work as planned and the house is worth more than the loan. 
     If you die or the home isn't the primary residence for more than 12 months, the loan comes due, which means either you or the estate has the option to repay the loan or put the home up for sale to settle it. 
     So, if the owner goes to a nursing home or moves in with children, or whatever, they will suddenly find they have to pay off the loan. Then, too, if one is not careful with their spending or runs into a major expense, they could run out of cash and possibly lose their home. They still owe taxes and insurance. 
     Reverse mortgages aren't all bad though. IF one doesn't plan to move, can afford the cost of maintaining a home and has enough equity, or if going to a nursing home is not a real possibility, it is possible to free up some cash.
     They are a bad idea if the home owner can't maintain the costs (property taxes, homeowners insurance, etc.) or wants to leave their home to someone. 
     In the end, you ultimately give up your home when the loan comes due. There has to be equity in the home of around 40 percent. There isn't a credit score requirement, but the FHA does require a review of credit and income to ensure the borrower can afford to maintain the property. If there's an existing mortgage, there must be enough equity to pay it off.  Here are some disadvantages: 
  •  Interest Accumulates: There are no monthly payments so the amount owed on the loan keeps growing. However, the amount owed will never exceed the value of the house. 
  • Loan Amount may be small: The actual loan amount is determined by a calculation using the appraised value, amount of money owed, borrower's age and current interest rates. 
  • Loans Are Complicated: Taking out one requires a lot of homework.
The main advantage: They eliminate mortgage payments and/or allow access to home equity while still owning and living in the home. 

US Dept. of Housing and Urban Development: Home Equity Conversion Mortgages for Seniors - Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.  Visit site.

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