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Reverse Mortgage : A Pragmatic Option

by: sahil | last updated: February 10, 2010
Category: Personal Finance | Tags: Reverse mortgege. mortgage. mortgage for seniors, finance

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Reverse Mortgage : A Pragmatic Option

Reverse mortgage is a type of senior financial product that can be useful for someone who has no means of obtaining a gainful employment. The reverse mortgage allows the homeowner to dip into the equity of the house and convert some of it into liquid cash. Senior citizens who are alone and have no dependents can opt for such mortgage.

Reverse mortgage is available to people who are above 62 years in the United States. The mortgage payment is postponed until the owner dies, the assets are sold, or the proprietor moves. The amount due is subtracted from the sale of the house, before it is paid to the estate. There are stringent regulations surrounding reverse mortgages, to make sure that senior citizens are not swindled into accessing the complete equity in their house, and then being required to move out. A reverse mortgage cannot be in excess of 40% of the equity in the house.

The interest rate on a reverse mortgage ought to be a lesser amount compared to a traditional mortgage, as it is totally asset backed, with a definite payment. In the US, the funds resulting from a reverse mortgage are not considered earnings for tax reasons. However, the interest overheads from the mortgage payment cannot be subtracted until the house is put up for sale, which is the point when the real interest payment is considered and subtracted from the price of the house.

When pondering over a reverse mortgage, inquire about any extra charges. In the US, 2% of the worth is charged in insurance and there is a 2% origination fee, which are subtracted from the mortgage payout total. In Canada and Europe, there are application fees, attorney fees and bank charges. There are also closing costs linked with a mortgage, which comprise of title searches, registering the lien among many others.

There are reverse mortgages for homes valued in excess of the highest boundary. These are called “Jumbo” reverse mortgages, and are usually obtainable as proprietary reverse mortgages. For homeowners of higher-valued houses, a Jumbo loan can give a better loan sum. However, these loans are at present uninsured by the FHA and their fees are frequently high.

It is vital to note that the homeowner must ensure that taxes and insurance are kept current at all times. If either taxes or insurance lapse, it could result in a default on the reverse mortgage. Once the reverse mortgage is established, there are no limitations on how the funds are used. In addition to the tenure monthly payments, the borrower has the option of moving the complete amount of money into investments, or they can simply take the money and spend it as they wish.