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Issue 3, June/July, 2008 REVERSE MORTGAGES Some of our clients ask us if a reverse mortgage is a good idea. Usually they are struggling on a fixed income and are looking for ways to keep up with the rising costs of utilities, food, and medical care. The answer - as it is so often - is that it depends. The basics of the reverse mortgage are simple enough to grasp. If you own a home and are at least 62 years old, you may be able to quickly get money by taking out a reverse mortgage. It allows an eligible home owner to borrow from the home's equity in a lump sum, line of credit, or regular monthly payments (called a "reverse annuity mortgage"), while not having to pay a monthly mortgage payment. The homeowner retains title and must pay insurance and property taxes while living there. The loan and interest are due when the homeowner dies or vacates the home. The home is then sold and the proceeds are used to pay off the loan. The most popular choice is the line of credit because it allows a borrower to decide whether he or she needs the money and how much. Moreover, no interest is charged on the untapped balance of the line of credit. While reverse mortgages look like no-lose propositions on the surface, they do have some significant downsides. First, the closing costs for these loans are about double those for conventional mortgages. These fees can amount to between four and eight percent of the total loan amount. These costs can be financed by the loan itself, but that reduces the amount of money available to the borrower. Reverse mortgage payments may also affect a borrower's eligibility for Medicaid. Generally, these payments will not be counted as income as long as they are spent within the same month that they are received. If the funds are not spent, however, they could accumulate and push a borrower's resources over the allowable limits for Medicaid eligibility. In addition, payments from a reversed annuity mortgage may be counted as income for purposes of Medicaid whether or not they are spent within the month they are received. You should consult with an elder law attorney if you have any concern about how a reverse mortgage will affect your eligibility for Medicaid. There are other pitfalls to be wary of besides the high fees and potential for Medicaid problems. Sometimes the lender requires home improvements as a condition for the loan which eats into the amount of money available to the borrower. Also, seniors should be aware of unscrupulous salesmen using pressure tactics. Some gloss over the costs and risks. Others persuade seniors to take cash from a reversed mortgage and use it to fund another investment, such as an annuity, thereby doubling up on their fees and commissions. The Financial Industry Regulatory Authority recently issed an investor alert regarding such tactics. Even the FBI is taking a look at reverse mortgages. The Associated Press has reported that the FBI has seen an uptick in reverse mortgage cases as part of its mortgage fraud inquiries. Reverse mortgages are complex products and borrowers are advised to acquaint themselves with the different options available and then carefully compare competing loan offerings. Reverse mortgages should be considered something of a last resort. Before taking such a step, consider all options, look at the consequences of the decision beyond the immediate future, and ask a lot of questions. The following two websites can help you get started in the process: |
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