Trading Home Equity for Cash

Source: Reversemortgageloanblog.com

Would-be borrowers still find most home mortgages tough to get in this semifrozen credit environment. A major exception isreverse mortgagesfor homeowners over age 62. These mortgages represented a growing market for the past decade. Even in recessionary 2009, the number of reverse mortgages grew 4 percent over the previous fiscal year.

Banks, brokers and savings and loans are happy to approve reverse mortgages because the Federal Housing Administration insures them; thus, lenders will be repaid even if the value of the house falls below the balance of the loan. And many consumers find reverse mortgages simpler to qualify for, because eligibility primarily involves borrowers’ age, home value and equity — not their income or credit history.

Earlier this year, moreover, Congress substantially raised the F.H.A.’s maximum loan limit to $625,500 (the amount a borrower actually receives depends on age and the home value but cannot exceed that amount). And it has extended that higher limit through 2010. The agency also set tougher standards for those who provide the mandatory credit counseling — usually by phone — for applicants.

Roughly 80 percent of heads of household over 65 are homeowners, federal data from 2007 show. For seniors who want to remain in their homes, reverse mortgages can provide a lump sum, monthly checks, a line of credit, or a combination of these. The loan is repaid when they die or move and the house is sold. In the interim, borrowers use the money for various purposes. They pay off their first mortgages and therefore no longer face those monthly payments. They pay down other kinds of debt. They invest in their houses or in other assets. They acquire a nest egg for emergencies or money for their everyday expenses.

“A lot of people are paying for home modifications,” said Barbara Hillard, a reverse mortgage specialist with M&T Bank in Montgomery County, Md. “They want to age in place, so they’re getting ramps, stair lifts, a bathroom downstairs so everything’s on one floor, curbless showers. They’re preparing their homes for their long-term care.”

But reverse mortgages probably should come with big red “handle with care” warnings. The F.H.A. insurance makes them more expensive than conventional mortgages from a bank, so they are probably not suitable for short-term uses; ordinary consumer loans, for those who can get them, may prove cheaper. Some lenders have used aggressive sales tactics or misleading marketing strategies to sell these products to people who aren’t good candidates for higher debt. And that is what reverse mortgages are: deferred debt, yes, but more debt, which could leave elders with little equity in their houses in later years, when they may need it more.

“People should consider the long-term consequences, not just their immediate needs,” said Barb Stucki, vice president of the home equity initiative at the National Council on Aging. “It’s not free money. If you use your house as an A.T.M., you could jeopardize not only your financial situation, but your ability to continue to live in the house.”

Still, the reverse mortgage can be a useful tool, especially for older people who are house-rich, or house-kind-of-rich, but cash-poor.

A good starting point for families wondering whether this loan makes sense for their older members is the council’s online brochure, “Use Your Home to Stay at Home.”

The council has a nationwide network of F.H.A.-approved reverse mortgage counselors (required for every applicant) who are happy to include adult children in their counseling calls. Those counselors are available free to low-income older people but charge $125 to others — but only if they decide to proceed with the loan.

The Department of Housing and Urban Development also can help you find other approved counselors in your area.

 

For Full Article Click here.

SeniorClarity News Home