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Reverse Mortgages: What You Must Consider Before Applying

06-28-2010
A reverse mortgage can be an ideal solution for older borrowers seeking cash from their homes or a more secure financial future. Reverse mortgages have many benefits for borrowers age 62 and older including the fact that borrowers don't make mortgage payments. The money they get from their lender is non-taxable and they don't have to sell the property or relinquish the property's title in order to get it. To reap these benefits, lenders get a portion of the equity that has built up in the home over the years.

A reverse mortgage loan doesn't have to be repaid until the home used to obtain the mortgage is no longer the borrower's principal residence. This could happen because of death, or when the borrower relocates, or when the home is sold. At that point, proceeds from the home's sale are used to repay the reverse mortgage balance. The borrower or his other estate receives any funds that remain after the reverse mortgage is repaid.

To ensure borrowers fully understand the terms and conditions and their options for receiving funds, all prospective borrowers must receive counseling. Any lender that offers reverse mortgage products must provide this counseling. After going through counseling, everyone involved should have a better idea of the advantages and disadvantages of this special type of mortgage.

When it comes to receiving reverse mortgage funds, borrowers have several payment options. The two most common are a lump sum and line of credit. Of course, lenders will explain all of the options, but only the borrower can decide. To help determine which payment option is best, borrowers are advised to consider what they'll use the money for and when they'll need it.

Something else that appeals to borrowers is the government's involvement. The U.S. Department of Housing and Urban Development, otherwise known as HUD, is a key supporter of the reverse mortgage lending industry. The Federal Housing Administration (FHA), a branch of HUD, created the first reverse mortgage called The Home Equity Conversion Mortgage or HECM. Because the FHA insures so many reverse mortgages, it plays a key role in overseeing and regulating the industry. The Administration's involvement combined with the fact that few private lenders offer these mortgages has helped stabilize reverse mortgage costs.

But interested borrowers should realize that there are costs associated with a reverse mortgage. They should also know that these costs usually are greater than those charged on traditional mortgage products. If a borrower doesn't plan to remain in the home more than a few years, the costs of a reverse mortgage may exceed the benefits. That's an important point to consider before applying.

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