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The housing crisis has not only hit those that own a mortgage. Those that own their homes outright have also seen the value of their homes drop, which reduces the money they have unlock from their home. One way to unlock cash from your home is to buy into a reverse mortgage. Reverse mortgages are, as their name suggests, a mortgage but backwards. Instead of paying monthly payments the bank pays you monthly payments, a lump sum, or a line of credit you can use when and how you like. This way you can stay in your home but still enjoy the cash. This is a personal finance version of having your cake and eating it.
The problem with reverse mortgages is, as everyone knows, they are expensive. However, they just got cheaper. Big reverse mortage providers like Bank of America, Metlife and Wells Fargo have dropped the origination fees and other charges related to reverse mortgages. What has caused this generous display of philanthropy to the elderly? Lenders are selling reverse mortgages as securities on the stock market, and demand is high. This is because reverse mortgages are backed by the government have a shorter lifespan, and their performance is more predictable.
Another reason is that less people are taking on these mortgages because the prices of homes has plummeted. The Federal Housing Administration also reduced the maximum amount available for a secured reverse mortgage.
Lenders are sweetening the deal by reducing the cost of reverse mortgages by up to $11,000. This does not make reverse mortgages cheap, they are still pricey, but if you were thinking about buying one they might deserve a second look now they got cheaper.
Who are they for?
Reverse mortgages are for elderly (over 62) homeowners that own their home outright or have a very small balance on their mortgage. With a reverse mortgage a homeowner can borrow money and use their home as security while still living in it. The upside is that you do not have to meet mortgage payments until you either sell the house or die. In both cases the money from the sale (sale or immediate payback of the loan is compulsive in case of death of the borrower) is used to pay back the loan. Anything left over will be given to the homeowner or his survivors.
The downside is that these mortgages are expensive. Take this example. A 67-year old gets a $200,000 reverse mortgage on his $370,000 reverse mortgage on his home. His initial costs will easily amount to $16,000, servicing costs over $5,000, and don’t forget interest rates which by the time he hits 80 will amount to $364,000. Even if the property is worth $720,000 at the time of death, the heirs will only receive $100,000.
It is worth talking to your children and other heirs before going down this path. They might be happy to help you out now and protect their inheritance.
Anyway, make sure you contact a free housing counselor near you and ask for what government aid programs you are eligible before you choose to get a reverse mortgage. You might not qualify for government aid once you buy a reverse mortgage, which is another factor to weigh out when deciding to buy a reverse mortgage.
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