Seniors, Do Your Homework Before Considering A Reverse Mortgage

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I have spoken to a few senior citizens who obtained reverse mortgages, but felt nothing but regrets afterward. Perhaps they did not read the fine print in a brochure that is required by FHA to read before they purchase the loan. After getting constant complaints about reverse mortgages, the government has changed the program, but there are still many dangers you need to be aware of.

A Reverse Mortgage is a type of loan open to seniors that are at least 62 years who have a home that is paid off or has a low balance, and they live in the house, and follow the terms of the loan.

The problem that many seniors seem to complain about is that they did not understand the very strict terms of the loan before they signed on the dotted line. Some told me the terms were so strict, it made their lives unbearable trying to live under the guidelines and stay in their home.

The reverse mortgage is different from a regular home loan in that it pays you from your loan proceeds, and is available regardless of your current income. The up front fees and cost of the loan, usually taken from loan
proceeds are very high--much higher than a regular home loan.

The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home, sales price or FHA's mortgage limits, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you may borrow.

Bare in mind that borrowing costs are far greater than a conventional second mortgage, and once you get a reverse mortgage, you can't get another loan on your home.

With a reverse mortgage, you don't make monthly principal and interest payments, the lender pays you according to the payment plan you select. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. If you get behind in real estate taxes or other required payments, you could be forced out.

With an FHA reverse mortgage you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment." But, you could be forced out for many other reasons, some of them subjective.

A Reverse Mortgage must be repaid in full if you meet the following criteria:

1. When you die or sell the home.
2. When you do not pay property taxes or hazard insurance or violate other obligations.
3. You permanently move to a new principal residence.
4. You, or the last borrower, fail to live in the home for 12 months in a row.
5. An example of this situation would be if you (or the last borrower) were to have a 12-month or longer stay in a nursing home.
6. You allow the property to deteriorate and do not make necessary repairs.

A subjective evaluation listed above is, "violating other obligations" that are normally listed in fine print. It is important to read all the information you can get from a non-sales person before considering this loan. Another subjective evaluation is if you "allow the property to deteriorate and do not make necessary repairs." This gives way too much power to the lender to take your home if they feel repairs are not adequate.

You can receive the money in a few different ways: In payments, in lump sum, or the combination of payments and lump sum. It's better to receive the money in payments to guard against premature spending.

Complaints I heard from seniors I consulted with were 1. They felt uneasy with the amount of monitoring. 2. If the money is taken in lump sum, there was a tendency to spent it quickly on unnecessary things. Remember, once the loan is taken, there can't be another loan taken on the house. 3. Seniors have complained that after taking out a reverse mortgage the loan officer strong arms them into taken out expensive insurance they don't need and can't afford, such as Long Term Care Insurance.

After doing your research and reading all of the fine print about this loan, call a HUD counselor to be sure you get all of the facts before you decide this loan is for you.

An alternative to a Reverse Mortgage is to sell your house outright, place the money in the bank, and have the bank send you a monthly check to live off, in a senior apartment.

The complaint some heirs have, is they were not successful in getting the remaining equity out of the home when their elderly relative dies.

Lois Center-Shabazz is the founder and editor of the personal finance website, Msfinancialsavvy.com, http://msfinancialsavvy.com
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