Understanding How Reverse Mortgage Works

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In a brief released by the Center for Retirement Research at Boston College, reverse mortgage was named as one of the "retirement levers" that could be as powerful as asset allocation in attaining retirement security.

Before that, another recognized institution into the retirement security, the Journal of Financial Planning, published a study aimed at maximizing home equity potential. The analysis showed that a retiree's residual net worth is likely to increase if a reverse mortgage is used in the early phase of retirement rather than as a last recourse.

With analysis after another crediting reverse mortgage for its potential in boosting retirement preparedness, it is but necessary for seniors to understand how reverse mortgage works. It is one way when others tell seniors that reverse mortgage is a viable retirement strategy, but it is another when they understand the scheme and are able to make their own assessment.

How Does A Reverse Mortgage Work?

According to the American Association of Retired Persons (AARP), a reverse mortgage allows seniors access to ready, tax-free cash without selling their homes, and without the burden of monthly payments.

Home Equity Conversion Mortgage (HECM) accounts for nearly all reverse mortgages made by retirees in the country. In 2011, retirees availed 73,131 HECM loans accounting for the 9.64 percent of loans made since the program's inception in 1990.
The HECM is a federally-insured plan that can give Americans at least 62 years of age greater financial security. According to the Center for Retirement Research, home equity is the retirees' largest asset aside from Social Security. Averaging nearly $140,000 in home equity, a typical retiree in the country can indeed manage solvency during retirement.

The amount of money that can be tapped from a reverse mortgage will depend on the age of the retiree, the current interest rate, and the FHA HECM mortgage limit of $625,500. The valuable the home is, the older the retiree, and the lower the interest rate, the bigger the loan.

Before a retiree can avail a reverse mortgage, a counseling with an HECM counselor is required. This counseling is neither psychological nor medical in nature, but an upfront education about the program. This is to avoid misinformation and to ensure that the retiree understands the process, his gains and his responsibilities when a reverse mortgage is availed.

The lender then will order an appraisal at the retiree's expense. The retiree has the choice to roll the expenses into the loan or pay out of pocket. Expenses include an origination fee and the customary closing costs. Origination fee largely depends on the appraised value of the property but is capped to $6,000.

Some Aspects of Lender's Services That A Retiree Should Ponder

Aside from interest rates, the retiree should also look into the mode of meeting and lender's other requirements. Does the lender offer face-to-face meeting? Does the lender require the senior to purchase a financial product as a condition for availing a reverse mortgage?

If a face-to-face meeting matters to a retiree, then a lender that meets this criterion should be chosen. The FHA mandated lenders to give retirees the option of meeting face-to-face or by telephone to complete a loan. If settling the loan origination activities via telephone does not sit right with a retiree, the lender must provide it or the retiree can walk away and look for a lender, which provides the said service. After all, it is the senior's home equity, which is at stake, neither the lender's nor anyone else's.

Moreover, the law prevents a lender from requiring a senior to buy annuities and long-term care and life insurance to be able to qualify for a reverse mortgage. Illegal requirement like this should be reported to HUD or to the National Reverse Mortgage Lenders Association (NRMLA).

The HUD has a list of FHA-approved lenders for a reverse mortgage, check their website. There are also informational websites that provide free lender comparison, search the web.

Education Before Engagement

As with any other retirement programs, understanding how a reverse mortgage works is one of the first steps to making an informed decision. The various nuances and implications of taking a reverse mortgage should be discussed first with financial planners, counselors and immediate family members. There are seniors who may be well served by reverse mortgage, and there are those who may be not.

 
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