For many Americans reaching the retirement age, the equity

build up in their home is their only real asset. Reverse

mortgage is a way to tap into this asset and create a stream of

income needed for retirement or take care of an unexpected

financial need that is usually related to health care costs in

the elderly.

Reverse mortgage is not like a refinance, equity loan or a

second loan on your home and there are some pitfalls.

So what is a reverse mortgage?

As the term implies the flow of money is reversed. Instead of

the homeowner paying the lender on a predetermined schedule,

the lender pays the homeowner and there aren’t any payments due

until the home owner moves or dies.

How did reverse mortgage start?

Roger Maris broke Babe Ruth’s single-season home-run record in

1961 but like most things in life, a single act of kindness has

a much longer longevity and a more widespread influence than

that of fame and ironically these acts of kindness remain

obscure.

The history of reverse mortgage can be traced to Nelson Haynes

of Deering Savings & Loan (Portland, ME) who made the first

reverse mortgage loan to Nellie Young, the widow of his high

school football coach. This event was reported to be motivated

by kindness and started a chain of events over the following

forty years to extend a helping hand to today’s retirees.

Reverse mortgage helps many retirees cope with their financial

difficulties and more importantly,helps them to have a way to

retain their independence and dignity. And retirees are

reaching for this solution in record numbers. According to the

National Reverse Mortgage Lenders Association in 2004, lenders

originated a record 37,829 HECM loans during the most recent

federal fiscal year - a 109 percent increase over the 18,079

loans closed the previous year.

Why would a lender do this?

The act of kindness may have started this idea but lenders are

not charitable organizations and they will not be in business

long if they don’t have a return on their investments. In this

case, they calculate the amount they lend based on the value of

your home, projected appreciation, your age and a number of

other factors. They expect to get paid the money they have lent

plus the interest when the homeowner moves or dies.

What are HECM Loans?

Federally-insured home equity conversion mortgage (HECM) is the

most common of reverse mortgage loans that the U.S. Department

of Housing and Urban Development started offering in 1989.

Who cares about federal insurance?

In traditional loans, when you borrow the money, you have the

cash in hand and the lender has taken all the risk secured by

your home. However in a reverse mortgage, you may plan to

receive a monthly payment over a period of time. What will

happen if the lender is no longer around to pay you?

This is why the federally insured reverse mortgage ads another

dimension of safety and peace of mind. This peace of mind also

comes with a price tag. HECMs limits the maximum loan amount a

homeowner can borrow.

What about Non-HECM?

Many lending institutions offer this category of reverse

mortgages and their limits are usually higher than that of

HEMD. However they are not federally insured and they can have

a much higher expense associated with their processing.

Can any one qualify for a reverse mortgage?

The eligibility requirements for a reverse mortgage are:

• You are a homeowner

• You are 62 years of age or older

• You own your home outright, or have a low mortgage balance

that can be paid off at the closing with proceeds from the

reverse loan

• You live in the home

• In case of HUD, you are also required to receive consumer

information from HUD-approved counseling sources prior to

obtaining the loan. You can contact the Housing Counseling

Clearinghouse on 1-800-569-4287 to obtain the name and

telephone number of an HUD-approved counseling agency and a

list of FHA approved lenders within your area.

• Upkeep of property taxes and staying out of bankruptcy are

also required.

How much money can I borrow?

The amount of money you can borrow is based on a different set

of formulas than the traditional mortgage qualifications. Your

age, the value of your home, the current interest rates, and

the loan costs impact the amount. Older individuals with more

valuable homes in lower interest rate environment can borrow

more.

What types of homes are eligible for reverse mortgages?

Single family, two-to-four unit properties, townhouses,

detached homes, units in condominiums and some manufactured

homes are eligible. However various restrictions apply to all

with most significant being that you own them, live in them and

have kept them in reasonable condition.

What about my heirs?

If death occurs while you still owe money to the lender, your

heirs are obligated to pay the borrowed amount, plus interest

and other fees, to the lender. They usually do this by selling

the house. Whatever remains after paying the lender belongs to

your heirs. The loan cannot be passed along.

What are my borrowing options?

You have five options:

• Tenure - equal monthly payments as long as at least one

borrower lives and continues to occupy the property as a

principal residence.

• Term - equal monthly payments for a fixed period of months

selected.

• Line of Credit - unscheduled payments or in installments, at

times and in amounts of borrower's choosing until the line of

credit is exhausted.

• Modified Tenure - combination of line of credit with monthly

payments for as long as the borrower remains in the home.

• Modified Term - combination of line of credit with monthly

payments for a fixed period of months selected by the borrower.

What about reverse mortgage scams?

Like most other scams directed to senior citizens,

telemarketing is on top of the list. Never agree to anything

over the phone, especially on the first call and do not give

personal information, financial or otherwise, over the phone.

There is never a cost associated with getting information on

reverse mortgages. This information is available for free. Ask

for written copy of everything that should include an address

and a phone number so that you can confirm the data.

• DISCLAIMER: Vishy Dadsetan, FreeCreditReport.ws or My

Favorite Shop, Inc. do not endorse any reverse mortgage product

or lender. This article and website does not provide legal,

accounting, or other professional services. If legal or other

expert assistance is required, the services of a competent

professional should be sought. Although Vishy Dadsetan has made

every effort to ensure the accuracy and completeness of the

information contained in this site, it assumes no

responsibility for errors, omissions, inaccuracies, or

inconsistencies.