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Reverse mortgages simply automatically borrow money from your home’s equity each month. This does not sound like a good deal. Reverse mortgages are gaining popularity as seniors living on fixed incomes are facing the financial challenges of rising costs for health care, energy and other daily expenses. According to an AARP survey, the majority of older Americans wish to live independently in their own homes for as long as possible. Reverse mortgages can be a godsend for seniors who are short on cash but have equity built up in their homes. Unfortunately, they can also be a way for unscrupulous operators to help themselves to some of the hard-earned cash retirees have built up over their lifetimes.
Reverse mortgages are aimed at senior citizens who would like some spendable income to meet their financial needs and who own sufficient equity in their homes. Reverse mortgages are usually a tough sell. They provide income or a line of credit to homeowners who are 62 or older by allowing them to tap into their home equity. These mortgages do not require repayment until the homeowner dies, permanently moves, or fails to maintain the property or pay property tax. Reverse mortgage interest is one such aspect.
Reverse mortgages allow elderly homeowners to consume some or all of the equity in their homes without having to ever move. Reverse mortgage origination fees can be very steep. For example, the benefit of never having to repay more than the value of the home comes at a cost: special insurance premiums are paid at closing and throughout the life of the loan. Reverse mortgages also allow seniors to enhance their retirement, and truly put the gold back into the "Golden Years."
Borrowers are not required to make repayments on the reverse mortgage loan as long as the borrower lives in the home. Reverse mortgage lenders recover the amount loaned on the reverse mortgage when the home is sold, however the borrower is still responsible for paying ongoing property taxes. Credit is subject to age and property qualifications and borrowers receive them for the rest of their lives no matter how long they live.
HECMs and proprietary reverse mortgages tend to be more costly than other home loans. The up-front costs can be high, so they are generally more expensive if you stay in your home for just a short time. HECMs are the only reverse mortgages issued by the federal government, which limits the costs to borrowers and guarantees that lenders will meet the obligations. The primary drawback to HECMs is that the maximum loan amount is limited. HECM loans are front loaded and not recommended for a short term solution. The fees may seem steep largely because they are federally insured which require an extra 2% of the lending limit to be paid to HUD to insure the program.
HUD and the FHA have imposed lending limits on the amount of the loan that lenders can give depending on the location of the property. This means that the amount of the loan will be less than the value of the home, depending on the percent approved by the FHA for your area. HUD’s Federal Housing Administration guarantees that you will receive all the payments that are owed to you. HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged two percent of the home's value as an up-front payment, plus one-half percent on the loan balance each year.
This means that instead of making payments, you receive them. With each payment, equity is drawn from your home; your mortgage increases and your home equity decreases. Instead of making monthly mortgage payments, you can actually RECEIVE them. This is the reverse of normal mortgages. Therefore, the lender pays you monthly.