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Federally insured reverse mortgages, also called home equity conversion mortgages, have been available since 1990. Aggressive marketing, the deflation of the housing bubble, and last year’s stock market crash have all contributed to a surge of interest. Applications are expected to exceed 120,000 for 2009.
A reverse mortgage, as the name implies, turns the idea of a conventional mortgage on its head. Instead of you sending the bank a monthly payment, it sends a payment to you: a monthly check, a lump sum, or an available line of credit. A corollary to this “reversal” is that your loan balance increases every month, instead of decreases. This loan balance, or the market value of the home, whichever is less, must be paid back when your home ceases to be your primary residence. Hence, you can keep this arrangement until you move away or die.
To be eligible for this program, the youngest homeowner/borrower must be at least age 62. In addition, the homeowner’s equity in the house must be at least 40%. Finally, the fair market value of the house must be at or below $625,500 at the time of application. This cap will drop to $417,000 on January 1, 2010. Unlike conventional mortgages, there is no income requirement for qualifying, making the program all the more enticing to retirees on a fixed income.
So is this program right for you? Unbiased financial planners and government agencies such as the Financial Industry Regulatory Authority (FINRA) advise extreme caution, noting that reverse mortgages should generally be viewed as a last resort. The next few blog postings will illuminate why that is so.
By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog