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Reverse mortgage basics


Dear Dr. Don,
I am interested in getting a reverse mortgage on my home. I am a 70-year-old woman and barely have enough money to live on. My only asset is my house, but I still have a mortgage loan balance of $35,000. Can you give me any advice? Thanks. -- Sue Sawbucks

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Dear Sue,
Reverse mortgages are growing in popularity because they allow people over 62 a way to tap into the equity in their home without having to make payments on a loan.

You don't have to own your home free-and-clear to have a reverse mortgage on the property. In fact, you can use a reverse mortgage to pay off your first mortgage. But how much you can borrow using a reverse mortgage will depend on the amount of equity you have in your home, the loan's interest rate and your age. In general, older people can borrow more because the lender expects the loan to be outstanding for a shorter period, so less interest will accrue on the loan.

You can get a reverse mortgage and then borrow money against it as needed, get a lump sum, or arrange to receive scheduled payments over time. The loan balance increases with each payment that you receive and interest expense accrues on the outstanding loan balance, so it will make sense for most people to receive payments over time vs. as a lump sum.

The payments aren't considered to be taxable income but may affect your ability to qualify for government assistance. It would be worth your while to consult with a CPA concerning the tax deductibility of the interest expense when the loan becomes due, confirm that the payments received aren't considered taxable income and to ask about how the payments change your ability to qualify for government assistance.

The payments that you receive plus the interest expense on those payments become due when your home is sold, but the amount owed on the reverse mortgage can't exceed the value of the home. You will pay closing costs to take out a reverse mortgage, but they can be financed through the reverse mortgage.

The reverse mortgage becomes due if you permanently move out of the home, if you sell the home or upon your death. You or your heirs can choose to repay the loan vs. selling the home when the loan becomes due. If the house is sold, any money that remains after paying off the reverse mortgage, other mortgages or other secured claims is yours.

The Department of Housing and Urban Development's (HUD) reverse mortgage program is offered through the Federal Housing Administration (FHA). Even though its loans are limited in size to the FHA limits for conventional mortgages, it has some consumer-friendly features like insurance and the ability to restructure payments if your needs change.

Just like a regular mortgage loan, closing costs and interest rates matter. So do the insurance premiums that the FHA charges. Don't look at this as free money because it's not. You're borrowing against the equity in your home. You're just not making any payments on the loan until either the house is sold or the loan becomes due.

Compare the FHA program to at least one private lender program. If you need help deciding on a loan, hire someone to advise you, preferably either a real estate attorney or a CPA or both.

Michael Larson's Bankrate feature will provide additional information on reverse mortgages as will the National Reverse Mortgage Lenders Association's Web site.

-- Posted: Aug. 2, 2001




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