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Should You Fund Your Dwindling Nest Egg With Reverse Mortgage?

By Charles Hopkins Published 01/2/2008 | Real Estate
According to mortgage experts within the last seven years (between 2000 and 2007) reverse mortgages have increased 10 fold. More and more senior citizens are funding their dwindling nest eggs with reverse mortgages.

What is a reverse mortgage? Reverse mortgage is a loan against the equity in your home. It enables you to raise cash to help to supplement your retirement. It's a loan that you do not have to pay back as long as you or the younger owner is still living in the house.

The cash you receive from a reverse mortgage can be used to do anything you want and can be paid to you in several different ways. It can be paid in a single lump sum, or as a monthly cash advance, or as a credit line account that lets you decide how much of your available cash will be paid to you, or as a combination of the available choices. No matter how it's paid to you, you typically don't have to pay anything back until you die, you sell the house, or move out of the house permanently. If you want to know how much you would be able to borrow you can go to www.tmaarp.com and use the reverse mortgage calculator.

What is the reason for the increase in reverse mortgages? The increase in reverse mortgages can be attributed to the financial situation over the period covered. Interest rates were relatively low while the home prices had climbed. That made it easier for homeowners to borrow more of their equity than the traditional mortgages while paying fairly low costs. The pressure also increased as the retirement nest eggs suffered because of the tech-stock crash.

About 90% of reverse mortgages are originated under the Home Equity Conversion Mortgage (HECM) program of the US Department of Housing and Urban Development (HUD). Reverse mortgage loans also come under programs from Fannie Mae and Financial Freedom Senior Funding Corp., a private lender. HECM is the only reverse mortgage insured by the federal government. HECM loans also require paying mortgage insurance premiums while the other private lenders do not. HECM loans are more popular because they enable you to get a larger amount. Older homeowners can borrow more because of shorter life expectancy and there is less chance that the loan will ever exceed the home value.

Who is eligible for a Home Equity Conversion Mortgage? To be eligible for a reverse mortgage you, and any other current owners must be age 62 or older; must live in the home as your principal residence; your home must be a single family residence in a one to four unit dwelling, condo or part of a planned unit development. Some manufactured housing is also eligible, but cooperatives and most mobile homes are not; your home must meet HUD's minimum property standards and you must discus the programs with a counselor from a HUD-approved counseling agency.

Should you fund your retirement with a reverse mortgage? In order to determine whether or not it's worth paying the costs of a loan, it would be wise to meet with a financial to discus all aspects of your current situation. This would be worthwhile because you can see that there are other alternatives that might be less costly.

If you are in chronic bad health and do not have much longer to live a reverse mortgage would definitely not be the right choice. Also if your home is in bad shape you should not take a reverse mortgage.