Tuesday, December 23, 2008

Even more on reverse mortgages

When we post about reverse mortgages one thing we often hear is how safe they are. While some of them are insured by the Federal Housing Administration (FHA) - these would be the Home Equity Conversion Mortgage (HECM). There are many that are not. All things not being created equal - and private reverse mortgages may not be.

In an article titled How to Fund Retirement Living from the Wall Street Journal, the different reverse mortgages are discussed. Side note - this is a good article for those of us getting up there in age or who have loved ones that are. Now lets take a look -

The amount you can borrow will depend on your age, how much your home is worth and current interest rates. For a HECM the limit is $417,000, but proprietary products may allow you to borrow more.

Payments can be taken as a lump sum, in regular installments or as needed, or through a combination of these options. The accrued principal and interest comes due when the last borrower dies, sells the home or moves out permanently.

A big drawback of a reverse mortgage is the high fees, which closely mirror the closing costs on a regular mortgage.

For this reason, says Sue Hunt, a housing counseling programs manager for Consumer Credit Counseling Service of Greater Atlanta, reverse mortgages tend to make the most sense for people who want to spend the rest of their lives in their homes and whose total income, including the loan, will be sufficient to cover all their future expenses, she says.

With any type of loan, it's important to ensure you understand the fees, interest rates and repayment terms.

For instance, an important safety feature of an HECM is that your payments from the lender are guaranteed by the federal government. Plus, if your home is sold for an amount lower than the value of the loan, neither you nor your heirs will be liable for the balance, which isn't always the case with proprietary products.

While these may be good for certain segment of the population it will probably not be the best choice for many.

We often wonder what the status will be for people with reverse mortgages another 30-40 years down the road. Since they can be acquired at 62 there will be people who have no equity left in the property after they have significantly aged. Will there be a push for them to vacate the property? Probably in private reverse mortgages. But what will happen to the HECM in another 30 years?

We also notice a big push for reverse mortgages of late - perhaps it is seen as the only growth area seen in the mortgage industry.

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