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Bankrate's 2008 Retirement Guide
Finding the funds
Sometimes, finding that extra bit of income can turn a retirement nightmare towards a happy ending.
Finding the funds
New rules rev up reverse mortgages
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Belling agrees. "We urge people to make sure they really need the loan now," she says. In some cases, she says, what a homeowner really needs is help with home repairs, taxes or utility bills. And often, there are local programs that can provide that assistance, so that the retiree might not have to resort to a reverse mortgage.

Adding to the confusion ...
There are two different types of reverse mortgages, and that can make the topic confusing. Federally backed Home Equity Conversion Mortgages, or HECMs, are guaranteed and regulated by the federal government. Private or proprietary loans aren't required to follow the same regulations.

"But up to this point, private lenders have, by best practices, complied with the same regulations," Hicks says.

Because the HECM loans are government-backed, the rates tend to be lower than with proprietary loans, Hicks says. In the past, when the amount of homeowners' equity in their homes was higher than local lending limits, they sometimes turned to proprietary loans, he says.

These days, there are not that many lenders making proprietary loans.

In the current economic climate, "at least 90 (percent) to 95 percent of the market" is composed of government-backed HECM loans, Belling says. Many of the companies that offered private loans "are not making them at this time," she says.

"The market really has changed," she says.

The trade-off
Reverse mortgage lenders don't consider your credit history. They will pull a credit report, but only to see if there are any outstanding liens that could affect the title to your home, Hicks says. Instead, they look at your age, life expectancy, any existing mortgage and the value of your house. They will calculate that, along with their standard interest rate and fees (including $30 to $35 per month to service your account), and make you an offer.

Borrowers seeking federally backed reverse mortgages are required to take a counseling session (usually about one hour) before they apply for the loans.

For a reverse mortgage, "the only out-of-pocket costs for consumers are the home appraisals and the counseling," Hicks says. In some cases, the counseling is offered free or at a low cost, but it can run as high as $125. FHA home appraisals generally run about $300.

Problems discovered during the inspection must be corrected, but they can be taken care of before or after the loan closes. If the homeowner chooses to do it after, money is set aside for that purpose.

-- Updated: Dec. 30, 2008
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