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What is a Reverse Mortage? What you need to know

Things to Know if You’re Interested in a Reverse Mortgage

I’ve been reading about reverse mortgages lately. There are more and more ads popping up about them, and I wondered what they were. It sounds like they provide a legitimate service, but also that more lenders are being unscrupulous about them. Here are a few helpful articles that help give you a solid picture of what HECMs (reverse mortgages) are, and what you should be aware of.

Article One: A Hud article about Reverse Mortgages

Reverse mortgages are becoming popular in America. HUD’s Federal Housing Administration (FHA) created one of the first. The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more. You can receive free information about reverse mortgages in general by calling AARP toll free at (800) 209-8085.

What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA’s HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

Can I qualify for FHA’s HECM reverse mortgage?

To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home.

What types of homes are eligible?

Your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.

Article two: Wikipedia entry about reverse mortgages

A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care).

In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g., 30 years) the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.

Article three: Reverse-mortgage industry comes under scrutiny
By Alan J. Heavens

Reverse mortgages are not necessarily a bad idea for homeowners 62 or older who want to cash out decades’ worth of equity.

But some of the people responsible for subprime and predatory lending apparently have turned to the reverse-mortgage business in force, using high-pressure tactics to trap more seniors into giving away everything and getting little in return.

“There are 2,700 [reverse-mortgage lenders] in the market today, and 1,500 of them made their first loans in 2008,” said Sen. Claire McCaskill (D., Mo.), who has been working on a bill to curb some of the worst abuses – including widening yield-spread premiums that benefit lenders and brokers at the expense of elderly borrowers.

McCaskill was part of a news conference yesterday sponsored by the National Consumer Law Center in Boston, which published a study warning that the reverse-mortgage market shows “systemic problems eerily similar to the subprime boom,” said its author, Tara Twomey.

Hopefully this info on reverse mortgages has helped. Read the full articles for a better understanding of them. In short, they can be a smart way to go, but care must be taken to make sure they are handled in the best way.

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