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Editors' pick: Originally published August 25.
CORRECTIONS AND CLARIFICATIONS: Originally, the article below stated, "Under the arrangement, investors offer homeowners annuity-type payments for their homes, in exchange for the title of the home after the owner dies." But in reverse mortgages, a homeowner does not relinquish title to the home. In addition, a reverse mortgage becomes payable in circumstances other than the owner's death. Changes have been made to paragraph four to reflect this change. It also stated, "Reverse mortgage homeowners are allowed to retain homeownership, with no mortgage payments." But homeowners do not relinquish title of their homes, as the sentence implies. Changes have been made to paragraph seven. It also stated, "Through a HECM, you can buy your primary residence if you're able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you're buying." Homeowners do not use reverse mortgages to finance the purchase of their primary residences, as the sentence implies. Changes have been made to paragraph eight. It also stated, "As for those costs, they can add up. Costs such as closing fees, lender fees, and insurance tend to be high for reverse mortgages. What's more, they aren't paid up front: they're represented in the offer for a reverse mortgage as reduction in the net amount to which you're entitled. Not surprisingly, many seniors are getting gouged." But homeowners have the option of considering different lenders, and fees may vary. The U.S. Department of Housing and Urban Development regulates fees. In addition, homeowners are protected by mortgage insurance premiums. Changes were made to paragraphs 10 through 13.
It's been a soul-degrading presidential election year, but it won't end after Nov. 8. Expect to see at least a few failed politicians touting the benefits of reverse mortgages on late-night TV.
Under the arrangement, homeowners borrow against the value of their homes. The loan comes due when the home is sold or no longer used as a primary residence. It may also come due when homeowners don't meet property or insurance payments.
Borrowers or their estates must not pay more than the loan balance or home's value. A reverse mortgage can be a good financial decision in the right circumstances.
The home is still the biggest asset owned by most Americans. The Commission on Retirement Security and Personal Savings recently reported that there's $12.5 trillion in home equity in the U.S. as compared to $14 trillion in retirement assets. It's likely that retirees will increasingly tap their home equity to make ends meet.
Under a reverse mortgage, homeowners 62 and older leverage their home equity to extract cash from their homes without having to make a mortgage payment. Reverse mortgage lenders take over the payments and recoup their investment once the home is sold, typically after the homeowner or a surviving spouse moves out of the home or passes away.
Seniors rely on reverse mortgages to supplement Social Security and other existing income sources, cope with unexpected medical expenses, pay the college costs of grandchildren, take a long vacation, even purchase a new home. From an investment standpoint, the cash infusion of a reverse mortgage also can be used to buy stocks, bonds, mutual funds or insurance policies.
Homeowners never relinquish title to their homes. The reverse mortgage enables seniors with insufficient income to tap their home equity without selling their domicile. Moreover, the income can make it possible for a retiree to delay taking Social Security payments in favor of larger payments down the road.