by Karen M. Kroll
bankrate.com
Record numbers of seniors are taking out reverse mortgages, and the federal government couldn't be happier.
In fact, it's encouraging even greater use of the technique, issuing grants to promote their use and offering discounts in certain cases.
With reverse mortgages, homeowners age 62 and older can draw money from equity they've built up over the years without incurring new debt and without having to move out of the homes they hold so dear.
Steadily increasing home values and low interest rates, coupled with pension depletions, stock-market losses and increasing living costs, are driving retirees to the reverse mortgage as a survival tool.
To many, it's a godsend. Others simply hate the idea. They're expensive and complicated, so check out all options and have a competent legal or real estate professional review the documents so you know what you're getting into and how much it will cost.
If you are in or near retirement, the phrase "house rich, cash poor" may ring true. The remedy, known as the reverse mortgage, is jumping in popularity, though it's still a minuscule portion of today's mortgage market.
As its name suggests, it's the reverse of the mortgage you used to buy your home. Instead of making monthly mortgage payments to a bank, the bank pays you. You're using the equity you've built up over the years.
You don't make payments until you move out of your home or die. At that point, you or your heirs have a year to repay the amount you received, along with fees and interest, either through refinancing or sale. If the balance equals or exceeds the value of the home, it can be signed over to the lender. You or your heirs would never have to pay more than the house is worth.
If you're at least 62 years old and have equity in your home, you probably can get a reverse mortgage on your primary residence. You retain the title to your home and still are responsible for maintaining it and paying property taxes.
Most reverse mortgages in the U.S. are the Home Equity Conversion Mortgages, often referred to as HECMs. Insured by the FHA (Federal Housing Administration), they're available from private lenders. You find an HECM lender by visiting your local HUD office or by visiting HUD's website. Fannie Mae, the government-sponsored enterprise that buys mortgages in the secondary market, has a reverse mortgage program called Homekeeper.
The amount you receive depends on the home's value, your age, interest rates and where you live. The higher the value of your home and the older you are, the more money you can receive, either as a lump sum, a line of credit, a monthly check or a combination.
Reverse mortgage payments are not taxed and don't affect Social Security payments.
Reverse mortgages carry closing costs, typically from 5 to 8 percent of the home's value. The costs are high because you make no payments until you sell your home. Until then, the interest compounds--in other words, there's not only interest on the principal amount, but also interest on the interest.
Experts see a crisis looming because many seniors don't have enough savings or insurance to pay for extended-care needs. Instead, they often turn to Medicaid, which pays primarily for nursing home stays, but not care given in the home.
Lynn Boyd, a senior counsel of the American Council of Life Insurers, says reverse mortgages can be a positive way to fund long-term care if the appropriate safeguards are put in place.
Not everyone agrees. Bonnie Burns, director of consumer education for California Health Advocates, says it might not be a sound economic decision for many seniors because they could strip out the equity in their home and then not be able to continue with the costs of long-term care, ending up with no care and no equity.
With this problem in mind, many experts advise elderly homeowners to sell their homes and move into more manageable and less-expensive quarters. This way they can get their built-up equity in a lump sum. Instead of paying interest, they can invest the money and earn interest and dividends.
On the Net:
www.hud.gov/ll/code/llplcrit.html
www.fanniemae.com/homebuyers/findamortgage
