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What is a Reverse Mortgage?
by barry mcdonald
12 January 2006

A Reverse Mortgage is a popular but complex home loan just for senior homeowners. If you qualify for a Reverse Mortgage, you will not have to make monthly payments on the loan. Instead, the lender pays you.

Typically, the Reverse Mortgage is repaid from your home's equity when you sell the home, move out permanently, or die. You, or those who will inherit from you, can keep any sales proceeds from your home in excess of what you owe the lender.

To qualify for a Reverse Mortgage, you must be a homeowner who is at least 62 years old. The mortgage on your home must be fully or nearly paid off. Generally, the amount you can borrow depends on the value of your home, the amount of equity you have in the home, and your age at the time of loan application.

If you are considering taking out a Reverse Mortgage, you can and should get free and confidential Reverse Mortgage counseling from trained housing counselors certified by the Department of Housing and Urban Development.

How Do I Know If a Reverse Mortgage Is Right For Me? A Reverse Mortgage may be right for you if: You have a regular need for additional living funds; You live on a fixed income, and your only asset is your home equity; You do not plan to leave your home to your children or others who will inherit from you.

Don't Take a Reverse Mortgage if: You want to leave your home, free and clear, to your children or heirs; You have another, less costly means to reach your financial goal.

A Reverse Mortgage can be an expensive way to borrow money. What Are Some of the Advantages of a Reverse Mortgage? A Reverse Mortgage can help you maintain your financial independence and an adequate standard of living. A Reverse Mortgage allows you to remain in your home and retain ownership. The money you receive from a Reverse Mortgage is tax-free.

What Are Some of the Disadvantages of a Reverse Mortgage? Reverse Mortgage options can be confusing and numerous. Get counseling. Reverse Mortgages are more costly to set up than other types of loans. Although the proceeds are tax-free, a Reverse Mortgage may affect your eligibility for certain "need based" public benefits such as Medicaid, Supplemental Social Security Income (SSI), and Medi-Cal benefits.

What Types of Reverse Mortgages are Available? There are three types of Reverse Mortgage plans available today: FHA-insured; lender-insured; and uninsured. Each type differs. A Reverse Mortgage counselor can help you decide which type is right for you and which lender offers the program that best meets your needs.

What Questions Should I Ask if I Decide to Shop For a Reverse Mortgage? Use this list of shopping questions:

How much money do I need? Is there a way to meet my needs that does not involve getting a Reverse Mortgage? Will a Reverse Mortgage make my partner or me ineligible for any government benefits, currently or in the future? Do I qualify for this Reverse Mortgage? How much can I borrow through a particular Reverse Mortgage product? How much will it cost me in fees and interest to borrow this money even if I don't have any "out of pocket" expenses? Will I have to sell my house before I die to pay off this Reverse Mortgage? What happens if I die, and my partner is still alive and living in the home; will he or she have to leave or pay the loan off? What happens if I have to go to a nursing home; will the loan become due and payable? What will I or my heirs have left after the loan is paid off? Are there any early-repayment penalties? What are my obligations under the Reverse Mortgage, such as home maintenance, property taxes and insurance?

Reverse Mortgage Essentials; Four important things you should do before getting a Reverse Mortgage:

1. Determine if you really need a Reverse Mortgage or if another type of loan would be better for you. Depending upon your needs and your financial situation, you may be able to meet your goals with another, less costly financial solution than that provided by a Reverse Mortgage.

2. See a HUD approved Reverse Mortgage counselor-free of charge - to help you decide if a Reverse Mortgage is for you, or to help you choose among the different types of Reverse Mortgages.

3. Shop around and compare! Not all Reverse Mortgages are created equal. They vary substantially in how much cash you can get, what they cost, and other features.

4. Consider whether a Reverse Mortgage might make you ineligible for any public benefits you now receive or may be eligible to receive in the future. For example, if you currently receive or expect to be eligible for any "need based" benefits such as Medicaid, Medi-Cal, or Supplemental Social Security Income (SSI), Reverse Mortgage payments will have to be structured so that monthly payments will be spent within the month they are received. If not, such payments will be considered "income," and may make you ineligible for public benefits. You should contact your benefits provider to ask about how a Reverse Mortgage may affect your eligibility.

The ordinary cautions when applying for a loan still apply: Don't sign anything you don't understand. Read everything before you sign. Never sign a loan application with blank spaces. If it sounds too good to be true, it probably is!

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