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Financial Opinion and Insights

Are Reverse Mortgages for You?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

 

You’ve seen the commercials with celebrities touting reverse mortgages;  ever wonder what they are?  Actually,  they are just what they sound like:   It’s a loan; but the lender pays you and they don’t get their money back until you (or the last surviving borrower) die, sell the home, or `permanently’ move out of it (usually for a year or more).  You or your heirs keep the difference between the value of your home and what you owed on the loan. 

Reverse mortgages aren’t for everyone.  Consumer Reports, their booklet,  50 Steps to A Richer Retirement, reports one study that found less than one percent of the people who would be eligible have signed up; but, these loans do allow many retirees to stay in their homes and get some of the accumulated equity out of it. 

In most cases, you must own your home as your principal residence and usually be 62 or older.  You also can’t have any other outstanding mortgages on your home unless you intend to use part of the proceeds to pay them off. 

There are two types of reverse mortgages: 

  • The Home Equity Conversion Mortgage (HECM) is insured by the Federal Housing Administration (FHA) and governed by FHA rules concerning loan amounts, costs, and eligibility.
  • Proprietary Reverse Mortgages are just what they sound like:  They are proprietary reverse mortgage products offered by private lenders.  These are generally more expensive than FHA insured mortgages, but they may also have higher loan limits – you need to do your homework on any increased benefits vs.  costs.

Watch your step!   Reverse mortgages can often come with high fees; so you need to do your homework and get everything spelled-out in writing. 

For more information about reverse mortgage pros and cons, see the AARP website and the National Center for Home Equity Conversion

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