KMIR 6 - Palm Springs News, Weather, SportsReverse mortgages can be useful, but do your research

Reverse mortgages can be useful, but do your research

By Andrew Housser

The reverse mortgage is a financial tool that is growing in popularity. Designed as a means for elderly homeowners who have substantial home equity and wish to stay in their homes, a reverse mortgage can provide tremendous peace of mind to seniors and help them stay out of painful debt. However, potential borrowers must understand the specifics of a reverse mortgage, be cautious and beware of those looking to take advantage of senior homeowners.

By educating themselves, seniors can avoid these bad decisions, decide if a reverse mortgage is the best course and find an ethical provider. While these loans can be appealing (instead of making monthly payments, the bank pays you -- either as a fixed amount each month, or a lump sum), they also are complex. If you believe a reverse mortgage could work for you or your family member, the next step is to gain a realistic understanding of this type of loan.

1) Understand the criteria

Reverse mortgages are available to borrowers age 62 or older. To qualify, you must have a significant amount of equity built up in your home. Homeowners with little equity generally will not qualify for a reverse mortgage.

2) Know your equity

Equity in a property is the difference between a property's market value and the amount of claims held against it (such as mortgage loans or liens). If a home is completely paid off, the equity is the current market value of the home. If you have a mortgage, your equity equals your home's value minus the balance of the mortgage. You must pay off any existing mortgages with the proceeds from the reverse mortgage before you begin receiving income.

3) Understand how the loan and income work

The most common type of reverse mortgages is formally known as a home equity conversion mortgage (HECM), because it converts the equity in a home into a mortgage that repays the homeowner, instead of being paid by the homeowner. A reverse mortgage is available regardless of the owner's current income or credit rating. The income typically does not affect Social Security or other benefits.

4) Find out how much you could borrow

The Federal Housing Authority regulates how much homeowners can borrow with a reverse mortgage. The amount varies with the home's value and the borrower's age. Get a ballpark figure with a calculator such as AARP's.

5) Determine the costs

Reverse mortgages are relatively expensive, because lenders must do more "upkeep" than they do on traditional loans. For that reason, lenders charge higher fees, sometimes up to 7 percent of the home's value. These fees are usually taken from the home's equity, reducing the net amount.

6) Understand the outcome for your home

Senior homeowners with a reverse mortgage can continue to live in the home until their death, as long as they pay property taxes (as they would need to do with any home ownership). When the last surviving homeowner dies, the home must be sold or refinanced with a traditional mortgage by the heirs of the estate. This means the home cannot be handed down free and clear to heirs.

7) Realize that a HECM is a debt

A reverse mortgage is a debt. The money you receive is owed to the lender. The loan comes due when you sell the house, move out of the house or pass away. Thus, your home will not be left free and clear to your heirs. Heirs must repay the loan if they wish to keep the home.

8) Educate yourself

Seek out trustworthy sources for information on reverse mortgages. Two good resources include the AARP, and the Federal Trade Commission's reverse mortgage fact page. For personalized counseling on your options, call the U.S. Department of Housing and Urban Development (HUD) at 888-466-3487 to be referred to an approved counselor. These counselors also can help you understand if you qualify for other benefits that might improve your financial situation. Most counselors charge about $125 for this service, but the fees can be paid from home equity. If you cannot afford the fee, you cannot be turned away.

A reverse mortgage can be a wonderful tool to help seniors live in the comfort of the home they worked hard to attain. But as with any major financial transaction, educating yourself is the best way to make the right decision for your future and that of your heirs.