Questions and Answers About Reverse Mortgages.

I talked recently about the rise of reverse mortgages and received a lot of questions of what a reverse mortgage is exactly and to give more details.

Paul Petillo, the managing editor at bluecollardollar.com and fellow blogger at retirementwithaplan.wordpress.com sparked this Q & A session. Check out out his blog. He has some interesting retirement tips.

This post I will show what a reverse mortgage is and who is eligible, why do people get a reverse mortgage, and discuss common misconceptions about reverse mortgages.

WHAT IS A REVERSE MORTGAGE and WHO IS ELIGIBLE?

- A reverse mortgage enables homeowners 62 and over to convert part of their home equity into tax free income.

: Title remains in the borrower's name.
: No monthly mortgage payments.
: No income or health qualifications.
: No minimum credit score.
: Loan proceeds may be tax-free.
:Neither the borrower nor their heirs will owe more than the home's appraised market value at the maturity of the loan.
:Heirs have options to pay off the loan.

HOW IS THE BENEFIT AMOUNT CALCULATED?

:Age of the youngest borrower on title (all borrowers must be at least 62)
: FHA 203b lending limit for the county or appraised value, whichever is less.
: Current interest rates.

WHY DO PEOPLE GET A REVERSE MORTGAGE?

According to an AARP survey, respondents who looked into and/or have a reverse mortgage used the money to:

-Pay off an existing mortgage.

-Help pay for necessities and every day living expenses (healthcare, prescription drug costs, paying off debt, fixing up their home)

-Improve their quality of life or to afford some "extras"

-Have money for emergencies or unexpected expenses.

For more information from AARP, visit http://www.aarp.org/

COMMON MISCONCEPTIONS ABOUT REVERSE MORTGAGES

Knowledge of reverse mortgage is starting to spread along with some misconceptions. Here are some of the most common ones:

-I COULD LOSE MY HOME: The borrower retains homeownership and title and they remain in their homes as long as they wish. They cannot be evicted or forced to sell, as long as they maintain their home and pay property taxes and homeowners insurance.

-MY CHILDREN OR HEIRS WILL BE RESPONSIBLE FOR REPAYMENT: This is a non-recourse loan and the lender can only obtain repayment from the sale or refinance of the home. You can never owe more than the home's value at the time the loan is repaid.

-I MUST OWN MY HOME FREE AND CLEAR IN ORDER TO QUALIFY: A portion of the proceeds from the reverse mortgage will be used to pay off the balance on an existing mortgage or home equity loan, thereby eliminating the current house payment.

-I MUST HAVE GOOD CREDIT AND INCOME TO QUALIFY: Neither credit score nor income are used for qualifying.

-A REVERSE MORTGAGE WILL INCREASE MY TAXES: The proceeds from a reverse mortgage are tax-free.

-WHEN A REVERSE MORTGAGE COMES DUE, THE BANK SELLS MY HOME" The loan must be repaid when the last borrower permanently leaves the home. The borrower or heirs can pay the balance due through a traditional refinance (or from other assets) and keep the home or sell it and use the proceeds to pay off the reverse mortgage.

-A REVERSE MORTGAGE IS EXPENSIVE: A reverse mortgage generally costs more than a conventional loan, but it is much less expensive than selling a home, relocating, or assuming new monthly expenses. Fees can be financed to reduce out of pocket expenses.

-ONLY "CASH POOR" SENIORS WHO FAILED TO PLAN FOR RETIREMENT GET REVERSE MORTGAGES: Some seniors may have a greater need for additional monthly income, however, reverse mortgages have become an option for financial planning and estate planning. Long term healthcare insurance and in home health care are also popular uses for the proceeds. Even seniors who have no immediate need are taking out a reverse mortgage, so they have a financial cushion for future or unexpected expenses.

I hope that answers some of the questions out there. If you have more let's try and get them answered.