Cashing In On Your Home
It's no surprise that reverse mortgages are becoming popular among seniors
Other variables, such as lending limits and interest rates, also determine how much of a home's equity you can borrow. But the homeowner can never end up owing more than the home eventually sells for, even if the sale doesn't cover the borrowing and accrued interest. If a sale more than covers the debt, you (or your heirs) get the excess.
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About 95 percent of reverse loans, made by mortgage brokers and banks, are an FHA-insured home equity conversion mortgage, or HECM. The insurance enables HECMs to carry a low interest rate and yield more to borrowers, even with a fee included for the coverage. Impeding some borrowers are geographic limits on the amount of a home's value, regardless of market worth, that will be considered in the calculation. While a value cap of $312,895 applies in the Long Island suburbs of New York, for example, the lid for homes in Iowa is $172,632, according to Ibis Capital, a reverse-mortgage software and data firm in San Francisco. One result: A $300,000 home in Iowa that might qualify for a $100,000 line of credit could get $178,000 if it were in Long Island.
Handy help. Homeowners in costly abodes, perhaps $600,000 and up, may do better with the Cash Account reverse mortgage created by Financial Freedom Senior Funding Corp. in Irvine, Calif. Since there is no valuation cap, borrowing is unlimited. Mortgage giant Fannie Mae offers a reverse-mortgage option with a twist: A senior can buy a new home and get a reverse loan in a single transaction. AARP offers a calculator and a guide at aarp.org/money/revmort to help clarify the choices (and a free booklet for those who call 800-209-8085). Help is also available from Financial Freedom ( financialfreedom.com ) and at reversemortgage.org , the website of the National Reverse Mortgage Lenders Association (866-264-4466 for a brochure by mail).
Reverse mortgages should be utilized with great care. That's why modern loans include consumer safeguards such as counseling. You're eating up equity in the home--funds you may later need for healthcare or sudden bills, or to move to assisted living. Closing costs and fees can make the deal costly if the loan is held for only a few years, especially if you use just a small part of the line of credit or opt for monthly disbursements. If interest rates trend higher, reverse loans will pay less to new borrowers and existing borrowers will rack up heftier interest charges.
Experts say some people may do better selling their home to raise cash and moving to a smaller, less expensive place. Still, being able to stay put when finances might dictate otherwise and discovering you can go to Cancun have a value all their own.
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