To recap part 1, Reverse Mortgages are loans that allow you to borrow back the equity in your home. If you are 62 years of age or older, they are a way to borrow against the equity in your home to provide you with tax-free income. Probably a good idea if you're a senior who needs cash for medical care, to maintain your standard of living, or for other reasons.
So, what are some of the disadvantages of Reverse Mortgages?
- They are even more complicated than conventional mortgages and the consequences of various options might not be always up front.
- They may be relatively expensive compared to other alternatives.
- Although the money you receive is tax-free, it may affect your eligibility for "need based" public assistance benefits such as Medicare, Supplemental Social Security Income (SSI) and Medicaid/MediCal.
- Reduces the equity you have in the property which could cause a potential negative impact for your heirs.
- This source of funds is often not well understood, even by real estate and legal professionals. (Check out their experience before accepting their advice.)
In general, what types are available?
- FHA-insured mortgages - Home Equity Conversion Mortgage (HECM).
- Lender-insured.
- Uninsured.
Each type differs in the amount you can borrow, how the proceeds will be paid, and allowed expenses such as interest, closing costs and other fees.
Here are some things to think about before getting this financing :
-How much money do you need?
-Is there another way to get the money you need ?
-Will a Reverse Mortgage make you or your partner ineligible for any government benefits - now or in the future?
-Do I qualify for this kind of Mortgage?
-How much can you borrow ?
-How much will it cost you in fees and interest to borrow this money, even if you don't have any out-of-pocket expenses?
-Will you have to sell your house before you die to pay off the loan ?
-If you die, and your spouse is still living in the home, will he or she have to leave or pay it all off ?
-Will the loan become due and payable if you go to a long-term care or nursing home?
-What will your heirs or you have left after the loan is paid off?
-Are there any early-repayment penalties?
-What are your obligations, such as property maintenance, property taxes and insurance?
Seven important things to do before you make a decision :
1. Decide how long you expect to stay in your home. These loans are relatively expensive for the first 2-3 years, so consider other options first.
2. Consult with a HUD-approved Reverse Mortgage counselor before you apply. This information service is usually offered free of charge. A counselor can help you decide what kind of financial help you need and what type is best.
3. Decide if you really need it. Another type of loan may be a less costly solution to meet your financial needs.
4. You might want to Include your family, especially grown children, in the decision-making process. It's good to get a general agreement among your heirs that going ahead with this type of mortgage arrangement is okay with them. Remember, you may be reducing their inheritance.
5. Shop around for the best deal. It may affect how much money you get immediately and in the long-term, how the money is paid out, how much you pay in interest and other charges, and so on.
6. Determine if your Mortgage affects your eligibility for "need based" public assistance benefits you may receive.
7. After you have considered all the facts, does getting a reverse mortgage make you happy ? If yes, that's a good sign. If you're not sure, best to examine all of the alternatives again.
That's all for this week. In Part 3 next week we'll talk about frequently asked questions concerning reverse mortgages - stay tuned !
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