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Interest-only mortgages: A great cash flow tool

Nov 06, 2006

Changing lives through reverse mortgage Brian Cooperreverse mortgage, HECM, FHA, HUD With the instability of the stock market, the rising cost of healthcare and the increasing cost of living, why not let your home work for you? In 1987, the Home Equity Conversion Mortgage (HECM) program was created. It is a program insured by the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD) that enables homeowners 62 or older to turn part of their home's equity into tax-free cash. The amount of money one may be eligible for is determined by the age of the youngest borrower, current appraised value of the home or the FHA county lending limit (whichever is lower), and the current interest rate. Any primary dwelling that meets HUD guidelines (single-family home, a two-to four-unit home where one unit is the primary residence of the borrower, condos, townhouses, planned unit developments and manufactured homes) will qualify. The HECM reverse mortgage is a non-recourse loan. This means that at the time that the reverse mortgage is repaid, a homeowner or his heirs can never owe more than the home is worth. One of the biggest misconceptions about the HECM reverse mortgage program is that the government or the lender owns the home or can take the home. This is not true! The borrower's name always remains on the title - he is always the owner of the home. As long as property taxes and homeowners insurance are paid on time and the home is kept in good repair, the homeowner cannot lose his home. Even if the loan balance exceeds the value of the home, the lender cannot pursue the homeowner or his estate for the difference owed. This is the only loan program that gives homeowners the ability to eliminate mortgage payments for as long as they live in their homes. No repayment is required until the homeowner sells the home, moves from the home for a period of 12 months or more, or dies. However, if the homeowner chooses to make payments toward the balance due on his reverse mortgage, there is no prepayment penalty. In the event of death, his heirs have the option to keep the home by refinancing the mortgage to pay off the balance due on the reverse mortgage, or sell the home, pay off the balance due and pocket the remaining equity. This is not the reverse mortgage of yesteryear, where the lender retained a piece of the equity. As the home appreciates in value, the homeowner can access more equity by refinancing his HECM reverse mortgage. Best of all, Social Security, Medicare and pension benefits are not affected. One of my most memorable clients would always tell me that she was her favorite charity. She used her reverse mortgage as it is intended: to live her life to the fullest and not let anything hold her back. The HECM reverse mortgage allows homeowners the freedom to pay off their existing mortgage and other loans or debt, pay living expenses, make home improvements, fund a grandchilds education, pay for long-term care insurance or supplement their retirement income, etc. The tax-free funds from a reverse mortgage can be received in monthly payments for as long as the homeowner resides in the home (tenure) or, if they prefer, for a set period of time (term). It can also be received in a lump-sum cash payment or put in a line of credit for future use, or any combination of these. Plus, if the homeowner chooses to put the funds into a line of credit, he only pays interest on money received - the unused balance will grow annually. The out-of-pocket fees are minimal since the closing costs are financed into the loan. A reverse mortgage differs from a home equity line of credit or a refinance in that there are no monthly payments to be made. When comparing loan options it is important to keep in mind that qualification for the HECM reverse mortgage is not based on your credit score or yearly income. You cannot be turned down due to bad credit or low income as in the case of a HELOC or refinance. A mandatory third party counseling session is a requirement of the loan process. Family members and/or trusted advisors are encouraged to attend. There is no charge for this service and it can be completed in person or over the telephone. At the end of the counseling session, the borrower is issued a certificate of completion. As an HECM reverse mortgage specialist, I am privileged to witness firsthand the positive impact this program has had on the lives of countless people across the country, from the woman who cuts back the prescribed dosages for her medications because she can't afford to refill her prescriptions, to the man who wants to buy a condo in Florida in order to forgo the cold winter months, to the couple who just wants to enjoy life without the concern of monthly mortgage payments. A reverse mortgage could be the right decision for those who have ever considered downsizing because they cannot afford their monthly mortgage payments, are struggling to live on a fixed income or have become a financial burden on their children. Brian Cooper is an HECM reverse mortgage specialist for Carteret Mortgage based in Owing Mills, Md. He can be reached at (888) 616-2667 or visit
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