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REVERSE MORTGAGES AND FUZZY RATTLESNAKES IN THE BLACK HILLS

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How can you draw value from your home to pay critical expenses without selling? The rising press coverage and skyrocketing use of government-led reverse mortgages might seem at first to offer a solution for you or your parents. Yes, but a furry rattlesnake could feel cuddly at first, too. A reverse mortgage can bail you out of a genuinely unpredictable jam. But it can also bite you back. Painfully.

The U.S. Department of Housing and Urban Development offers a reverse mortgage program that is insured by the U.S. Federal Housing Administration. But others have characterized the reverse mortgage as the seniors' own sub-prime swamp.

There are several alternative ways to start drawing cash from your home to pay critical living expenses:

  • Sell the home for cash

  • Second-mortgage cash loan

  • Home Equity Line of Credit

  • Reverse Mortgage.

 

The reverse mortgage is available only to seniors over age 62. And the government even makes you get financial counseling before securing the reverse mortgage. The reverse mortgage has been characterized as "the self-funded bailout for Baby Boomers' parents." In a sense, it's somewhat like borrowing money from yourself. It is generally a program only for people who have high percent equity in their home, with little balance on the mortgage.

The concept of a reverse mortgage is simple. Some one, such as a bank, loans money to you in exchange for "equity interest" in the eventual sale of your home. It may be on a graduating scale so that the equity interest is fully transferred piece by piece over time. A reverse mortgager can withdraw value from their home's equity in alternative ways, including:

  • A loan of one lump sum amount

  • A monthly recurring payment

  • A line of credit.

 

There are two categories of reverse mortgage sources:


  1. Home Equity Conversion Mortgage (HECM)
    Offered by the U.S. HUD, and insured by the U.S. FHA. These account for the great majority of reverse mortgages.
  2. Proprietary Reverse Mortgages
    Offered by banks, credit unions, etc.

 

Some of the complaints against reverse mortgages mention high pressure sales tactics, including otherwise-optional products (such as long term care insurance) as if required to accompany the loan, and just plain high fees for originating and servicing the loans.

And these "gotcha's" can seem overwhelmingly complex for elderly people. For example, if someone takes a lump sum payment in the form of a reverse mortgage for home repairs but fails to spend it in the same month as the distribution is taken, then the left-over money may be counted next month as an asset against net-worth limits for medicaid eligibility.

Because of the rough image some people have of reverse mortgage lenders, the National Reverse Mortgage Lending Association offers a code of ethics for reverse mortgages. The NRMLA reports over a 1,000 percent increase in the number of reverse mortgages in recent years. The NRMLA lists two reverse mortgage lenders for the Black Hills and Rapid City areas. These are the Financial Freedom Senior Funding Corporation and Wells Fargo Home Mortgage. These folks are prepared to offer advice on reverse mortgages.

For related information, contact me or ask me for a copy of the booklet "Use Your Home to Stay at Home," or a copy of the study "Tapping Home Equity in Retirement."

But what ever you do, or your aging parents, please proceed very, very carefully when getting the government involved in lending your own money to you. That's got big amber caution-flags all over it.

(For more information about the Black Hills and Rapid City real estate market for homes for sale and land investments for retirement, or for green homes, and real estate for Baby Boomers, see http://www.hillswatch.com/).

 

Posted by Lee Alley, www.BHhomes.INFO, Rapid City, Black Hills, SD at 7:27 PM  

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