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Reverse Mortgages

A reverse mortgage is a loan made to people who own their home free and clear, and who want to extract equity from the home in the form of cash. These loans are designed for retired people who may need the capital they have invested in their house to augment retirement pensions, Social Security and/or Medicare.

A reverse mortgage provides the home owner with a certain amount of money that need not be paid down or paid off until the occupants of the home either sell the house and move, or pass away. The funds can provided as a lump sum, in monthly installments, or on an as-needed basis like a credit line. Reverse mortgages are becoming a popular option among our growing population of older people - many of whom have only their home as a major asset.

Reverse mortgages can be expensive. The points charged to acquire one and the interest rate applied to them is above and beyond what one would find with a standard mortgage. For that reason, it is important that the seniors who are considering a reverse mortgage understand what the cost of the loan is. The FHA has have a regulation that no homeowner holding an FHA insured loan may take out a reverse mortgage until he/she has been through a counseling session with one of the professionals working for the FHA or HUD.

The FHA has recently implemented its own reverse mortgage program, as has Fannie Mae. The FHA calls them Home Equity Conversion Mortgages (HECMs); Fannie Mae calls its initiative the Home Keeper Program. Both programs have differing sets of loan limitations, and interest rates. Generally speaking, however, the sums available to reverse mortgage candidates rise with their relative ages.

FHA has established limits on reverse mortgage amounts based on the median home values associated with the county where the home is located. Fannie Mae's program takes the actual value of the home as the benchmark for loan amounts. The rule of thumb is that a HECM is cheaper but provides less of a monthly stipend (or lump sum) while Fannie Mae's Home Keeper program has a higher interest rate but makes more cash available to the home owner.

Homeowners have different reasons for seeking these loans. Those who are interested in leaving at least a portion of the home's value as an estate may want to make do with a HECM. If inheritance is not a concern, the Home Keeper program provides a larger monthly payout. If the reason for the loan is long term medical care or some other personal setback, the question becomes how much is necessary to cover the additional costs or lost revenue. Reverse mortgages are going to prove an essential tool over the next few decades, especially if the Social Security program implodes as predicted. Medicare will remain inadequate and fewer people are preparing for retirement today than have done so in past generations.

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