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by: Vishy Dadsetan
For many Americans reaching the retirement age, the equity
build up in their home is their only real asset. Reverse mortgage
is a way to tap into this asset and create a stream of income
needed for retirement or take care of an unexpected financial
need that is usually related to health care costs in the elderly.
Reverse mortgage is not like a refinance, equity loan or
a second loan on your home and there are some pitfalls.
So what is a reverse mortgage?
As the term implies the flow of money is reversed. Instead
of the homeowner paying the lender on a predetermined schedule,
the lender pays the homeowner and there aren’t any payments
due until the home owner moves or dies.
How did reverse mortgage start?
Roger Maris broke Babe Ruth’s single-season home-run
record in 1961 but like most things in life, a single act
of kindness has a much longer longevity and a more widespread
influence than that of fame and ironically these acts of kindness
remain obscure.
The history of reverse mortgage can be traced to Nelson Haynes
of Deering Savings & Loan (Portland, ME) who made the
first reverse mortgage loan to Nellie Young, the widow of
his high school football coach. This event was reported to
be motivated by kindness and started a chain of events over
the following forty years to extend a helping hand to today’s
retirees.
Reverse mortgage helps many retirees cope with their financial
difficulties and more importantly,helps them to have a way
to retain their independence and dignity. And retirees are
reaching for this solution in record numbers. According to
the National Reverse Mortgage Lenders Association in 2004,
lenders originated a record 37,829 HECM loans during the most
recent federal fiscal year - a 109 percent increase over the
18,079 loans closed the previous year.
Why would a lender do this?
The act of kindness may have started this idea but lenders
are not charitable organizations and they will not be in business
long if they don’t have a return on their investments.
In this case, they calculate the amount they lend based on
the value of your home, projected appreciation, your age and
a number of other factors. They expect to get paid the money
they have lent plus the interest when the homeowner moves
or dies.
What are HECM Loans?
Federally-insured home equity conversion mortgage (HECM)
is the most common of reverse mortgage loans that the U.S.
Department of Housing and Urban Development started offering
in 1989.
Who cares about federal insurance?
In traditional loans, when you borrow the money, you have
the cash in hand and the lender has taken all the risk secured
by your home. However in a reverse mortgage, you may plan
to receive a monthly payment over a period of time. What will
happen if the lender is no longer around to pay you?
This is why the federally insured reverse mortgage ads another
dimension of safety and peace of mind. This peace of mind
also comes with a price tag. HECMs limits the maximum loan
amount a homeowner can borrow.
What about Non-HECM?
Many lending institutions offer this category of reverse
mortgages and their limits are usually higher than that of
HEMD. However they are not federally insured and they can
have a much higher expense associated with their processing.
Can any one qualify for a reverse mortgage?
The eligibility requirements for a reverse mortgage are:
* You are a homeowner
* You are 62 years of age or older
* You own your home outright, or have a low mortgage balance
that can be paid off at the closing with proceeds from the
reverse loan
* You live in the home
* In case of HUD, you are also required to receive consumer
information from HUD-approved counseling sources prior to
obtaining the loan. You can contact the Housing Counseling
Clearinghouse on 1-800-569-4287 to obtain the name and telephone
number of an HUD-approved counseling agency and a list of
FHA approved lenders within your area.
* Upkeep of property taxes and staying out of bankruptcy
are also required.
How much money can I borrow?
The amount of money you can borrow is based on a different
set of formulas than the traditional mortgage qualifications.
Your age, the value of your home, the current interest rates,
and the loan costs impact the amount. Older individuals with
more valuable homes in lower interest rate environment can
borrow more.
What types of homes are eligible for reverse mortgages?
Single family, two-to-four unit properties, townhouses, detached
homes, units in condominiums and some manufactured homes are
eligible. However various restrictions apply to all with most
significant being that you own them, live in them and have
kept them in reasonable condition.
What about my heirs?
If death occurs while you still owe money to the lender,
your heirs are obligated to pay the borrowed amount, plus
interest and other fees, to the lender. They usually do this
by selling the house. Whatever remains after paying the lender
belongs to your heirs. The loan cannot be passed along.
What are my borrowing options?
You have five options:
* Tenure - equal monthly payments as long as at least one
borrower lives and continues to occupy the property as a principal
residence.
* Term - equal monthly payments for a fixed period of months
selected.
* Line of Credit - unscheduled payments or in installments,
at times and in amounts of borrower's choosing until the line
of credit is exhausted.
* Modified Tenure - combination of line of credit with monthly
payments for as long as the borrower remains in the home.
* Modified Term - combination of line of credit with monthly
payments for a fixed period of months selected by the borrower.
What about reverse mortgage scams?
Like most other scams directed to senior citizens, telemarketing
is on top of the list. Never agree to anything over the phone,
especially on the first call and do not give personal information,
financial or otherwise, over the phone.
There is never a cost associated with getting information
on reverse mortgages. This information is available for free.
Ask for written copy of everything that should include an
address and a phone number so that you can confirm the data.
* DISCLAIMER: Vishy Dadsetan, FreeCreditReport.ws or My Favorite
Shop, Inc. do not endorse any reverse mortgage product or
lender. This article and website does not provide legal, accounting,
or other professional services. If legal or other expert assistance
is required, the services of a competent professional should
be sought. Although Vishy Dadsetan has made every effort to
ensure the accuracy and completeness of the information contained
in this site, it assumes no responsibility for errors, omissions,
inaccuracies, or inconsistencies.
About The Author
Vishy Dadsetan writes articles that can actually help your
clients. Articles that make sense. Articles just like this
one. For more information about the following refer to FreeCreditReport.ws
http://www.freecreditreport.ws/homemortgage/mortgage-refinancing.html
http://www.freecreditreport.ws/homemortgage/reverse-mortgage.html.
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