Reverse Mortgages

These special mortgages allow you to live off your nest egg and in it, too. Like home-equity loans, reverse mortgages now come in several forms. You can choose between either fixed monthly payments, a lump sum, or a line of credit on which you can draw funds as you need them. You pay nothing back until the term is up, when the advances plus interest must be repaid, presumably from the proceeds from the sale of your home. Monthly income is tax-free. In addition, nonin-sured loans can be obtained from some state and local government agencies, nonprofit organizations, and private lenders.

INSURED LOANS. A program run by the Federal Housing Administration (FHA) provides government-backed insurance to local, private and public lenders who make approved reverse mortgages to older home-

owners. You are eligible if you own your home and are at least 62. If you are married, your spouse must also be at least 62.

The FHA sets the initial maximum payout that can be made through the reverse mortgage, basing its calculation on your age (or your spouse's age if younger), interest rates and equity in the home—up to the limit set by the agency in your area.

Using that figure as a starting point and assuming a certain rate of appreciation on your home, the lender then calculates what you could take out in a lump sum at settlement and what you could obtain as regular monthly income or withdraw periodically as needed. As you receive payments from the lender, you create a debt of principal and interest that you must eventually repay. When the house is sold or when you move, your equity pays off the loan. (There are ways to structure the mortgage to ensure that you will always have some equity if you have to move in the future.)

The FHA pools the insurance premiums it collects on each reverse mortgage. The pooled funds can be tapped by lenders who lose money on their loans. This could occur when a borrower outlives his equity—that is, he lives so long or the home appreciates so little that the final loan balance exceeds the value of the house. Whatever happens, you or your heirs would never owe more than the proceeds from the sale of the home, minus sales expenses.

FHA-insured loans offer five payment options:

■ Tenure. With this option, you get equal monthly checks for as long as the house is your principal residence.

■ Modified Tenure. You can combine a line of credit with monthly payments for life or as long as you live in the home as a principal residence.

■ Term. You receive equal monthly payments for a fixed term. You choose the term.

■ Modified Term. You can combine a line of credit with monthly payments for a fixed period of months.

■ Line of credit. You determine when you need to

Whatever happens, you or your heirs would never owe more than the proceeds from the sale of the home, minus sales expenses.


For free information on reverse mortgages, check out the following sources:

■ AARP (The American Association of Retired Persons) publishes Home-Made Money: A Consumer's Guide to Reverse Mortgages (#DI2894). The booklet's table of contents is available online at You can order the booklet online or by calling 800-209-8085.

■ The Department of Housing and Urban Development (800-217-6970; buying/rvrsmort.cfm).

borrow money and the amount. You may borrow up to the permitted limit.

Whichever option you choose, you can alter the payment pattern in the future should circumstances change. If you select a loan with a tenure or term-payment option, you may want to combine it with an agreed-upon line of credit that will permit you to tap a portion of the loan for unanticipated needs. Say you sign on for a tenure loan that pays $300 a month. A year later, you find you need to add a bath on the ground floor of your home for your husband, who has become too frail to use the only existing bath, on the second floor. You could contact your lender and request a lump-sum payment to make the improvement—as long as your request would not exceed the principal limit of the loan.

FHA-insured reverse mortgages can be fixed- or adjustable-rate loans. Lenders are permitted to offer reverse adjustable-rate mortgages with monthly interest-rate adjustments and no annual limitation on interest increases, providing they also offer annually capped loans, which must carry a lifetime interest-rate cap of no more than five percentage points and an annual limit on rate increases or decreases of no more than two points.

With a reverse ARM, the payments don't change when interest-rate adjustments are made to the loan, but adjustments have the effect of increasing or decreasing the rate at which your equity is used up.

THE FANNIE MAE 'HOME KEEPER.' Fannie Mae has developed the Home Keeper Mortgage, a reverse mortgage that allows you to tap your equity through a line of credit, fixed monthly payments, or a combination of the two. With this plan, borrowers choose a particular payment method at closing, but can change the method at any point.

To be eligible, you and your spouse must be at least 62 years old and own your home free of debt (or be able to pay off any note with money from the reverse mortgage at closing). You'll also receive counseling from the lender offering the reverse mortgage. The counseling program was developed by Fannie Mae.

Home Keeper offers a higher loan limit than the FHA mortgage as well as some different options. You can choose a revolving line of credit, which gives you the flexibility of borrowing against your line of credit, repaying the debt, and borrowing against the line of credit again. If you decide upon a fixed monthly payment, you can also choose to stop payments for whatever period of time you choose. All fees and interest on the debt will, of course, continue to accrue.

Rates for Home Keeper are variable and based on the one-month CD index published weekly by the Federal Reserve. There's a 12% lifetime cap on the loan, which can be adjusted monthly up to the full 12%. For more information about Home Keeper, call Fannie Mae at 800-732-6643.

BUYER BEWARE. Before you begin drawing on your equity, make sure you understand fully the costs, fees and risks associated with a reverse mortgage. Standard fees you will come across include an origination fee, a service fee to cover monthly paperwork, a mortgage-insurance premium for FHA loans, and other closing costs that vary by state. Most costs can be rolled into

If you're receiving medicaid or supplementary social security income, check with the appropriate office before you finalize a reverse mortgage.

In a sale-leaseback, parents typically sell their house to a son or daughter, who immediately leases it back to them for life.

the loan (except origination fees on FHA loans).

Though the receipt of payments shouldn't affect your social security income or medicare eligibility, you do need to be careful if you're receiving medicaid or supplementary social security income. Discuss this with your state's social security or medicaid office before you finalize any loan.

If you select a reverse-mortgage program that is not FHA-insured, find out if the loan amount can exceed the home's value. If this is the case, and you live in an area where home values are declining, you could be responsible for debt beyond the value of your home. With an FHA-insured loan, you can never owe more than your home's value or the loan limit, whichever is lower. You also can't be forced to sell or move if your loan exceeds the limit.

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