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How Do Reverse Mortgages Work for Seniors?

It's comforting to believe our parents are financially stable in their fully-paid-off homes, and that they'll live in familiar surroundings filled with good memories until the end of their lives.

Can overwhelm the most carefully thought-out plans and leave your parents seriously strapped for money

However, an unexpected crisis can throw off this happy vision. For instance, older people often have to take expensive drugs for various ailments. The cost of such drugs can seriously tax someone limited to a fixed income. Then there's the annoyance and expense of things breaking around the house, like the furnace and plumbing, which have to be fixed. Property taxes may keep rising. The physical demands of routine yard work can be too much for those with arthritis or who are limited in their mobility. These stressful occurrences plus a hospitalization or two can overwhelm the most carefully thought-out plans and leave your parents seriously strapped for money.

When we find out that finances have become a dilemma for our parents, the first thing many of us think about is selling their house and moving them in with us or into a retirement home. Some people might be happy with this arrangement, but what if your parents would prefer to remain in their own home? There is a way to help them achieve this goal. It's called a reverse mortgage.

What is a reverse mortgage?

A reverse mortgage works in the opposite way of the traditional mortgage. It allows homeowners to access the equity they've built up over the years, like a second or third income. The loan company pays the homeowner instead of the other way around.

A HUD (Housing and Urban Development) reverse mortgage makes a variety of offers to suit an individual's needs. Homeowners may choose to take one lump sum, receive monthly payments, set up a credit line account that lets the homeowners pick and choose when they need money and how much they need or a combination of the above methods.

With such flexible options, the reverse mortgage can make life much easier on elderly homeowners by providing much needed money to supplement Social Security income or IRA's.

One of the most important points to remember about a reverse mortgage is that it does not need to be repaid until the borrower sells the home or dies.

The requirements

It isn't difficult to qualify for a reverse mortgage. You simply have to be sixty-two years old or older and your home must either be paid off or your mortgage balance nearly to its end. To make certain a reverse mortgage is the best choice, it's mandatory that the interested homeowners meet with a counselor who is knowledgeable about the process. This person can explain how reverse mortgages work, offer other solutions and options, and answer any questions the homeowner may have.

You can find a list of counselors approved by HUD online. HUD can also be contacted at 1-888-466-3487.

What you can do with the money

There are no guidelines or requirements as to what you can do with the money. Generally, homeowners may use the money to supplement Social Security income, pay medical costs, make repairs or improvements to the home, take vacations, pay credit card debt or even take care of taxes. The majority of people applying for reverse mortgages are choosing the line of credit option. This option is the most flexible, and gives you control over how much money you receive and when.

How much does the homeowner receive?

When the homeowners sit down with a counselor, several things will be determined. How old is the homeowner or the youngest of the married couple? What does the home appraise for? What is the lending limit in the homeowners' area and what is the interest rate? Speaking generally, the less you owe on the home, the more valuable it is, and the older you are the more money will be available to you.

Staying in our own homes

You may wonder how this mortgage is paid back to the mortgage company. With reverse mortgages, nothing is paid back until the home is no longer being lived in by the homeowners, the home is sold or the last of the homeowners die.

If the home sells for more than what is owed to the mortgage company, the extra goes to the selling homeowners or the homeowners' estate.

Typical costs of a reverse mortgage

Arranging a reverse mortgage is similar in some ways to acquiring a traditional mortgage. There are costs involved which include an origination fee, a mortgage insurance premium, an appraisal fee and closing costs.

Because reverse mortgages are only available to elderly people who are commonly on a fixed income, the majority of these fees are usually capped. As another benefit, they can be placed within the reverse mortgage itself so that the homeowner needs very little or no up-front cash.

The mortgage insurance premium makes sure that the homeowner or the estate will never owe more than the value of the home when it comes time to repay the loan. It also guarantees that if the loan company goes out of business, the government will take over the loan and continue to make sure the homeowner still receives their money.

Another option

If the homeowners want to sell their old home in order to buy a new one closer to their family, for instance, there's one way to do it using a reverse mortgage.

Through a service called the "Home Keeper for Home Purchase Program," elderly homeowners can purchase a new home without acquiring a monthly mortgage payment and without having to come up with closing costs.

If the new home costs $50,000 more than the old one sells for, then in order to avoid taking out a traditional mortgage, the homeowners must use the entire amount of cash they received from the sale of their old house and find another $50,000.

But with a Home Keeper reverse mortgage, these homeowners can buy the new house using the money they made on the sale of the old house plus the reverse mortgage and avoid monthly mortgage payments and closing costs.

Safeguards

To protect homeowners and their survivors, certain safeguards have been set up. It is guaranteed that if the home sells for more than what is owed to the mortgage company, that extra money will go back to the homeowners or their estate.

The mortgage insurance premium, a mandatory part of the reverse mortgage, guarantees that the homeowners will not be left penniless if the mortgage company goes out of business. The government will step in and take over the loan. It also guarantees that the loan will never be more than the value of the house.

As long as you live in your home, the reverse mortgage does not have to be paid back. You don't need to have a certain income to qualify for this mortgage since there is no monthly payment. You are using the equity you have built up in the value of your home, and fees and interest rates are capped by regulation.

The rules concerning full disclosure make certain that the homeowner sees and understands the costs involved in acquiring a reverse mortgage. Also, a reverse mortgage cannot become due for any reason while the homeowner(s) are alive and living in the home, and there are no prepayment penalties if the homeowners decide they want to pay off the loan.

The homeowners have three days to change their minds after signing papers for a reverse mortgage, and, if they do, the loan is then cancelled.

Selling might still be the better option

Many of us would like to remain in our homes until we die. We're familiar with the place, we may have raised children there, we have fond memories there and moving is simply a hassle. But before you sign the papers to get a reverse mortgage, it's a good idea to compare the two options. Only when you know how much you could make by selling your home and how much it would cost you to buy or rent a new one can you make an informed decision. Assisted living apartments, which are becoming more commonplace, are popular with many people. Check out what else is available in your community before you decide.

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