Fraud Tip of the Day - August 3

Look before leaping into a reverse mortgage

If you're over 62 and considering a reverse mortgage, you can't miss this fraud Guides Tip of the Day. The thought of being able to receive part of the equity in your home as a loan against the home can be very tempting. It feels like "free" money without having to give up the home you've lived in for most of your adult life.

However, entering into a reverse mortgage is a big decision. Just as big as the decision to buy your home initially, so weight your options carefully.

What are Reverse Mortgages?

A reverse mortgage is the opposite of a standard mortgage taken out to purchase a home. Similar processes occur as you apply for a reverse mortgage from a lender; however, instead of being based on your income, the reverse mortgage amount is based on the value of your home, the equity in the home and your age. There are several options available for receiving your reverse mortgage disbursement: a lump sum, monthly payments or as a line of credit.

Repayment is also different from a standard mortgage as it isn't required until either sell your home, move somewhere else or die. Interest accrues over time so the amount you owe on the reverse mortgage does increase. When one of the previously mentioned terminating events occurs, you (or your family) get to keep what's left after repaying the amount owed to the lender.

Who can get a Reverse Mortgage?

Qualifications for a reverse mortgage include:

• Reverse mortgage applicant must be at least 62 years old.
• The mortgage on your home must be completely or near completely paid off.
• There aren't any current income requirements for getting a reverse mortgage.

What should you consider before applying for a reverse mortgage?

According to the Association for the Advancement of Retired Persons (AARP), there are five questions one should ponder before seriously considering a reverse mortgage. The following was taken from AARP's website in January of 2009 (http://www.aarp.org/money/revmort/5_questions_to_ask_before_considering_a_reverse_mo.html):

• Do you really need a reverse mortgage?
  
  Why are you interested in these loans? What would you do with the money you would get from one? Are the needs you intend to meet really worth the high total cost of these loans? If you want to take a dream vacation, a reverse mortgage is a very expensive way to pay for it. Investing the money from these loans is an especially bad idea, because the loan is highly likely to cost more than you could safely earn. If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that's generally a good sign that you don't need it and shouldn't be buying it.
  
  
• Can you afford a reverse mortgage?
  
  These loans are very expensive, and the amount you owe grows larger every month. The younger you are when you take out a reverse mortgage, the more the compound interest will grow, and the more you will owe. On the other hand, due to high up-front costs, these loans can be especially costly if you sell and move just a few years after taking one out.
  
  
• Can you afford to start using up your home equity now?
  
  The more you use now, the less you will have later when you may need it more, for example, to pay for future emergencies, health care needs, or everyday living expenses. This is especially so if your needs suddenly grow or your income does not keep pace with inflation. You may also need your equity to pay for future home repairs or a move to assisted living. If you are not facing a financial emergency now, then consider postponing a reverse mortgage. Homeowners who decide to wait have "a reasonable expectation of securing a better product at a lower cost in the not-too-distant future," according to a report by the Fidelity Research Institute.
  
  
• Do you have less costly options?
  
  Do you have other financial resources that you could use instead of taking out a loan? If you don't, and if you could easily make the monthly repayments on a home equity loan or home equity line-of-credit, these alternatives are much less costly than a reverse mortgage. Many state and local governments offer very low-cost loans for paying your property taxes or making home repairs. Have you seriously looked into the costs and benefits of selling your home and moving to a less expensive one?
  
  
• Do you fully understand how these loans work?
  
  Reverse mortgages are quite different from any other loans, and the risks to borrowers are unique. Before considering one, you need to do your homework carefully and thoroughly.

The options for reverse mortgages can seem daunting and you want to make sure you choose the correct one for your particular financial situation. We recommend counseling first from an impartial, experienced financial housing professional. They can help you decide if a reverse mortgage is appropriate and which type is a good fit. Additionally, they may even be able to assist with looking at other alternatives to reverse mortgages, like public assistance.

The following organizations provide no or low cost, HUD approved housing counseling:

• National Foundation for Credit Counseling (NFCC) - 1-866-698-6322
• Money Management International (MMI) - 1-877-908-2227
• American Association of Retired Persons (AARP) - 1-800-209-8085

Reverse Mortgage Links: