May 14, 2014 THE VILLADOM TIMES I • Page 9 Pros and cons of securing a reverse mortgage Geared toward senior citizens, reverse mortgages are growing in popularity and inspiring the curiosity of older homeowners. A reverse mortgage is a loan available to people over the age of 62 that enables borrowers to convert part of the equity in their homes into cash. People of retirement age may find that their limited income can make monthly expenses more difficult. Reverse mortgages were con- ceived as a method to help people at this stage in life use the money they put into their homes to pay off debts or cover routine living expenses. The loan is dubbed “reverse mortgage” because instead of the homeowner paying money to a lender as is customary with a traditional mort- gage, the lender makes payments to the borrower. The borrower is not required to pay back the loan until the home is sold or vacated. As long as a person is living in the home, he or she is not required to make any payments toward the reverse mortgage loan balance. However, the borrower must remain current on insurance and tax pay- ments. When a person takes out a reverse mortgage, he or she may borrow a portion of the market value on the home. As of 2012, the maximum loan amount available in the United States was $625,000. Any outstanding existing mortgages are paid off with the proceeds of the reverse mortgage, and either a lump sum of the balance or monthly payments are established. A homeowner may also opt for a line of credit with the reverse mortgage proceeds. Here is a more in-depth look at the pros and cons associated with reverse mortgages. A reverse mortgage enables seniors to live in their homes for the rest of their lives without fear of mortgage payments. Because there are no payments being made during the life of the loan, borrowers do not have to meet income requirements or credit checks. As long as the borrower continues to maintain resi- dence in the home, he or she is still eligible for the monthly payments received through the reverse mortgage. This money can be used for any purpose and is tax-free. Bor- rowers can opt to modernize their homes or make safety improvements. The funds can also be put toward medical expenses or travel. Because the government insures the reverse mortgage program, borrowers need not worry about receiving their payments. Should a lender fail to make a payment, the borrower is eligible for that money and a late fee. Another benefit of reverse mortgages is they protect homeowners against falling home prices. If the value of the home drops after the loan is negotiated, it will not affect the equity value assessed for the life of the loan. One down side to reverse mortgages is that the loans have higher up-front fees than other types of financing. Borrowers have to pay an origination fee, closing costs, and mortgage insurance costs. These initial costs can total several thousands of dollars. Unlike a traditional mortgage, where the balance gets lower and lower over time, with a reverse mortgage, no payments are being made on the loan. This means the loan balance simply gets larger over time depending on how much money is drawn from the home’s equity. At the end of the loan, when the homeowner moves from the prop- erty, or the house is vacated upon the borrower’s death, the value of the estate decreases based on the pay-off value of the reverse mortgage loan. Heirs will pay off the mortgage by selling the home and will only inherit the remaining money after the reverse mortgage lender has the loan sat- isfied. This means people will be leaving less money for their heirs, but those heirs will not be personally liable if the home sold for less than the value of the mortgage. The mortgage lender has to claim a loss and request reim- bursement from the Federal Housing Administration. Something many seniors may not know about reverse mortgages is that these loans can affect eligibility for some need-based programs. Although Social Security and Medicare are not affected, Medicaid and other gov- ernment assistance programs can be affected if a senior has a surplus of funds from a reverse mortgage that is not spent during the month. A reverse mortgage is a long-term solution. People who are looking for a short-term fix will find that this type of loan probably does not meet their needs. Furthermore, it is hard to be approved for reverse mortgages on newly purchased homes. Lenders usually like to see at least six months or a year chain of title on a property before issuing a reverse mortgage. Many seniors find reverse mortgages confusing. Seniors may unwittingly agree to a loan without fully understanding the scope of the reverse mortgage. It is advisable to seek counseling on reverse mortgages before applying for one.