Reverse Mortgages: A potential loan option for seniors.

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Reverse mortgage are becoming very popular with America's senior citizens. Those 62 and over can cash in their home equity without incurring mortgage payments and without selling their homes.

Reverse mortgages come in different forms: HUD's Home Equity Conversion Mortgage (HECM) and Fannie Mae's Home Keeper are two options designed to serve different populations. The maximum HECM loan amount is determined by the age of the youngest borrower (older people can take a higher percentage of the home's value than younger borrowers), the current interest rate (the lower the rate, the higher the percentage of the home's value that can be converted to cash), and the lesser of the appraised property value or the maximum FHA loan limit in the property's county.

FNMA's Home Keeper product was designed to meet the needs of those who can't be helped by HUD's program: those with higher-value properties, condominium owners, and those who want to use the proceeds from a reverse mortgage to purchase a different home. Home Keeper loans can be bigger because the FNMA (Fannie Mae) loan limit of $417,000 is considerably higher than the FHA limits.

Disadvantages: The upfront charges of originating and servicing a reverse mortgage can be quite high. Many advisors recommend that homeowners find other sources of funds if they don't plan to remain in their houses for at least 5 years; it takes some time to offset the cost of taking out this loan. Borrowers who aren't capable of keeping up their home may find themselves in trouble; lenders can request immediate repayment if the property becomes run down or the taxes and insurance go unpaid. These buyers may be better off selling a too-large home and trading down to something more manageable. Reverse mortgages only work for those with no mortgage or only a small one. And program loan limits mean that seniors who own very expensive homes can't take advantage of all the equity with a reverse mortgage. Other options may be more attractive and appropriate.

Advantages: Other advantages include the fact that unlike traditional mortgages, reverse mortgages don't require monthly payments from the homeowner, so seniors on limited incomes don't have to worry about making enough to qualify for a loan. And those with credit problems needn't worry either. As long as they keep the home in good repair and pay their real estate taxes and insurance, they cannot be foreclosed on. Instead of worrying about sending a check to a lender, reverse mortgage borrowers get checks from their lenders--as long as they live in their homes.

Borrowers who opt for lifetime payments can't outlive their mortgages. They will continue to receive monthly payments even if the amount paid to them exceeds the value of the home, and they will never owe more than the home's value. And borrowers who move out of their homes don't lose them. The loan has to be repaid, and usually is from the proceeds of selling the property. However, any proceeds exceeding the loan balance is returned to the borrowers or their heirs. Borrowers can choose from several options for receiving their loan proceeds: monthly payments for life, a series of payments for a fixed number of months (HECM only), a line of credit, or a combination of a line of credit and monthly payments. And because these funds are loan proceeds, they are not considered income by the IRS, and they are not taxed.

Watch Out...There are some dodgy lenders out there offering reverse mortgages as part of a retirement or estate planning services. Estate planners may offer to find a good reverse mortgage--for a price. The necessary information to obtain these mortgages is available online from HUD and it's free of charge. Others may use a hard sell to get seniors to purchase investments like annuities or insurance by using the proceeds of a reverse mortgage. By the time all the costs are added, the homeowner pays way too much for whatever benefit (if any) received. Finally, disreputable lenders may slip in excessive fees or sneaky clauses that let them pocket any increase in the home's value during the life of the loan.

Good News! The good news is that borrowers can avoid reverse mortgage scams by checking first with a HUD-approved mortgage counselor, getting several quotes from HUD- or Fannie Mae- approved lenders, and making sure they understand all terms and conditions before signing.
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