Fraud Tip of the Day - August 3

Look before leaping into a reverse mortgage

In today's housing market, many seniors are sitting on a gold mine, their home's equity. Reverse mortgages make tapping into that wealth a whole lot easier. It's very tempting, especially for those living on fixed incomes unwilling to sell the home they've lived in all their lives. With a reverse mortgage, you can extract some of that equity AND remain in your home. It's like having your cake and eating it, too. But mortgages are big decisions, and reverse mortgages are no different, so you should weigh this decision carefully. A good place to start is defining what reverse mortgages are and explaining how they work.

What are Reverse Mortgages?

In a reverse mortgage the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application. You have the option of taking the money in a lump sum, in monthly payments, or as a line-of-credit. Reverse mortgages differ from home equity loans and second mortgages in that repayment isn't required until you sell your house, move somewhere else, or die. The amount you owe increases over time because you don't make payments. If you sell your house, you get to keep whatever's left above and beyond what you owe the lender.

Who can get a Reverse Mortgage?

To qualify for a reverse mortgage, you must be at least 62 years old. The mortgage on your home must be completely or nearly paid off. You can get a reverse mortgage regardless of your current income.

Some things to consider before applying for a reverse mortgage:

• Reverse mortgage fees can be costly and you may be required to pay them with cash. However, most lenders allow a portion of these costs to be financed as part of the loan balance. In addition, interest, insurance and service charges will be added monthly to the loan balance. Thus, the amount you owe the lender increases over time.
  
  
• Is a reverse mortgage absolutely necessary? You might be able to make ends meet by exploring alternatives to a reverse mortgage that cost a lot less money over the long run. For example, you may reduce your expenses if you qualify for such benefits as a property tax credit or abatement. Even if you determine that you need a loan, another type of loan may better meet your needs and be less expensive than a reverse mortgage.
  
  
• The reverse mortgage loan may not be enough for you to make ends meet now or in the future. For example, a 65-year old with $50,000 in home equity who wanted a reverse mortgage as a monthly income supplement may get as little as $100 per month on a term mortgage.
  
  
• The reverse mortgage allows you to retain ownership of your home but doesn't free you from the responibility of paying property taxes, insurance and maintenance costs.
  
  
• Taking advantage of a reverse mortgage could make you ineligible for local government or Federal aid programs such as Supplemental Social Security (SSI) and Medicaid. If you don't spend your entire monthly loan payment in the month it's received, your payments will be considered "income," and may make you ineligible for public benefits. You should contact your benefits provider to ask about how a reverse mortgage may affect your eligibility.
  
  
• If leaving your home to your children or anyone else as an inheritance free and clear is important to you, a reverse mortgage may not be the best option. After you've passed away the loan will have to be paid off before anyone can inherit the home. The lender will want its money back and will sell the home if necessary.
  
  
• You may be offered the option of using some or all of a lump sum payment to purchase an annuity. An annuity is an insurance product. Monthly payments are made to the you for the rest of your life. The IRS does not tax loan advances as income, but annuity advances may be partially taxable. See a tax professional for guidance.
  
  
• Beware of reverse mortgage scams! For example, some senior homeowners have been contacted by firms offering to assist them in finding a lender that does reverse mortgages, in exchange for a "small percentage" of the loan. This information is available for free from the Department of Housing and Urban Development (HUD) by calling toll-free, 1-888-466-3487. You will be referred to a HUD-approved housing counseling agency.
  
  
• Compare offers for reverse mortgages. Reverse mortgages vary in cost. Of course, the cost of the loan affects how much cash you ultimately receive from the loan.
  
  
• As with any loan, do not sign anything you don't understand. Do not sign a loan application with blank spaces.
  
  

Evaluating reverse mortgage options may be confusing. Before you apply for a reverse mortgage you should get counseling from an impartial housing counselor. A counselor can help you decide if a reverse mortgage is right for you, or help you choose among the different types of reverse mortgages. A counselor may also help you identify and apply for public benefits. Such benefits may reduce your expenses or increase your income and do away with the need to apply for a reverse mortgage.

Free counseling is available from HUD-approved housing counseling agency. For referral to a HUD-approved housing counseling agency call 1-888-466-3487.

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