Reverse Mortgages: An Idea Whose Time Has Come, IRED

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December. 2003
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Reverse Mortgages: An Idea Whose Time Has Come

By W. J. Fontenote

Sometimes a really good idea comes along. Reverse mortgages may be such an idea for seasoned citizens. If you are 62 or older and need some extra income, but do not want to refinance or sell your home, a reverse mortgage may be for you.

A reverse mortgage (RM) is a loan that allows you to convert some of your equity in your home to cash while you retain home ownership. RMs work like traditional mortgages, but in reverse. The lender pays you rather than you paying the lender. An RM does not require any repayment of principal, interest or fees for as long as you live in your home. Funds from an RM may be used for any purpose.

To qualify for an RM, you must own your home and you should have 70-80% of the home paid off. The best case is when your home is debt free. The reason for this is that RMs must generally be first mortgages and any existing lien must be paid off.

You can receive funds in a lump sum, in monthly advances, through a line of credit, or a combination of the three. The amount you eligible to borrow is generally based on your age, the equity in your home, and the interest rate on the loan.

Since you still own the home, you remain responsible for taxes, repairs, and maintenance. The RM becomes due when you permanently move, sell your home, die, or reach the end of the loan term. If you die, your heirs must pay off the loan.

There are three types of RMs These types are:

FHA insured. You can receive monthly loan advances, a line of credit, or both with this type of RM. Under this plan, the FHA protects you by guaranteeing that loan advances will continue to be made to you even if the lender defaults. The FHA plan allows you to make changes in payment options at little cost.
Lender insured. With this type of RM, you can receive monthly loan payments or a line of credit or both. As indicated, the lender is insuring you that future payments will be paid. You should check the financial rating of the lender before making this type of loan.
Uninsured. This RM is totally different from the other types. An uninsured plan provides monthly loan advances for a fixed term only. Your loan balance becomes due at the end of the term. Also, the payments are not insured by anyone,

RMs can be very complicated and hard to understand. The best protection that you have is the Federal Truth in Lending Act, which requires lenders to provide detailed information about the plan's costs and terms. You should also get an Annual Percentage Rate disclosure so that you know the total cost of borrowing the money. Make sure that you discuss your plan with family members and other consultants so that you completely understand what you are buying.

W.J. Fontenote
William Jarrell Fontenote succumbed to cancer on February 12, 2006. Rest in Peace, Beloved Friend.

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