Mortgage Refinancing - In Considering a Reverse Mortgage Be Aware

Reverse mortgages can dramatically improve the quality of life for many older Americans. But they need to go into the transaction with their eyes wide open.

Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender generally sets these fees and costs.
The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions.
Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance and other expenses. So, for example, if you don’t pay property taxes or maintain homeowner’s insurance, you risk the loan becoming due and payable.
Increasing your debt may not seem like a wise financial strategy at first—indeed, it isn't for everyone—but your reverse mortgage debt is different from most other kinds. Usually, taking out a loan means you must commit to repay it using money that you will earn in the future—in other words, using money that isn't guaranteed.
Non-recourse Loan. When you take out a reverse mortgage, on the other hand, you are guaranteed to have the money to pay it off because the loan is based on the equity you already have in your home. That's because a reverse mortgage is what is known as a non-recourse loan, which means that your home is the lender's only recourse to collect on the debt. None of your other assets are affected.

Only when you sell or move from your home, or when you pass away, will the lender be able to collect on the debt, and if the home's value is less than the outstanding balance, you will not owe a single dollar of the difference. On the other hand, if you sell the home for more than the loan balance at that time, you or your heirs will keep the difference.
Talk to a counselor. Seniors considering a federally funded reverse loan, called a Home Equity Conversion Mortgage, are required to talk it over with a counselor. The US Department of Housing and Urban Development maintains a list of all counselors. Older American advocacy groups such as AARP also have lists of counselors. (www.AARP.org and search “reverse mortgage.”)

Websites with calculators to give seniors an idea of how much money they'll be able to borrow with a reverse mortgage are available on the Internet.
This is an important new financial tool for many people, but it is essential that the inner workings of the transaction be clearly understood.
Financial security. You may already have plans for how you want to use your reverse mortgage proceeds. But it's wise to remember all the work that’s gone into building up those funds, and how important they are to your financial security--particularly if your home is your largest remaining financial asset.
Of course, there was a reason you sought a reverse mortgage in the first place.

Whether it was to improve your home, supplement your income or pay for medical expenses, the important thing is that you decided to use your equity to improve your lifestyle and stay in your home. As long as you manage your money wisely and keep your goals in mind, your reverse mortgage will help you do just that.
How much of your home’s equity will be left after repaying the loan depends on many factors: the size and frequency of your loan advances, increases or decreases in your home’s value, future interest rates and others. Because so many variables are involved, no estimate will be absolutely certain. But a reverse mortgage counselor or specialist can help you estimate your leftover equity as accurately as possible, based on how and when you plan to use your loan proceeds.
Consider your heirs. Whether you tap into your home equity with a reverse mortgage or through some other financing program, the more of that equity you spend now, the less will be left for your heirs. That’s why it is important to think about how you want to involve your children or other loved ones in the process.
Often, the adult children of senior borrowers are happy to see their parents continue living in their homes, and relieved to know that they are financially secure.
Tax and public benefit considerations. The IRS currently treats reverse mortgage proceeds as loan advances rather than as taxable income. You may encounter tax implications if you use the funds to purchase an annuity, however, so you should check with your tax advisor regarding your vulnerability.
Proceeds from a reverse mortgage will have no affect on Social Security or

Medicare benefits because they are not need-based. Benefits such as SSI and Medicaid, however, may be affected if you carry any of your reverse funds over from one month to the next. You should check with your local benefits program administrator to find out if you are in danger of becoming ineligible.
Be cautious if anyone tries to sell you something, like an annuity, and suggests that a reverse mortgage would be an easy way to pay for it. If you don’t fully understand what they’re selling, or you’re not sure you need what they’re selling, be even more skeptical.

Keep in mind that your total cost would be the cost of what they’re selling plus the cost of the reverse mortgage. If you think you need what they’re selling, shop around before you buy.
Three days to reconsider. No matter why you decide to take a reverse mortgage, you generally have at least three business days after signing the loan documents to cancel it for any reason without penalty. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing.