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Using a reverse mortgage
A reverse mortgage loan is similar to a home equity loan. These programs pay you either a lump sum amount or annuity based on the amount of equity in your home. You or your estate repay the debt when you sell or vacate the home, or at death. Any remaining equity goes to your estate.
Unlike home equity debt, however, reverse mortgages do not offer the tax benefits.
Some reverse mortgage programs are insured, which prevents you from having title to your home taken by a lender that is eager to be repaid at any cost, even if it means you're out on the street. To avoid these kinds of programs, it's best to consult a financial adviser before considering a reverse mortgage loan.
Fannie Mae runs three reverse mortgage programs:
- Home Keeper. This program is the simplest of the programs and aimed at homeowners wanting to tap their equity, not draw down the entire amount. A lender that participates in the program pays you an annuity or lump sum. You repay the loan when you sell the home, no longer use it as a primary residence, or die. You or your estate repays the loan, with interest and other financing costs, with a choice of payment plans.
- Home Keeper for Home Purchase. This program allows you to buy a new home with a reverse mortgage loan, using the new home as a source of repayment. You make a down payment and use the reverse mortgage loan for the rest of the home's purchase price. You repay the loan, with interest and other financing costs, when you sell the home, no longer use it as a primary residence, or die. Most types of homes are eligible, including units in a planned community.
- Home Equity Conversion Mortgage. This program is affiliated with the Federal Housing Administration (FHA). It combines features of a home equity loan and line of credit. You receive a fixed payment and, in addition, can draw on a credit line for extra amounts. This program is aimed at converting, or using, the equity in your home to live on during the rest of your lifetime. Any equity that is left over goes to you or your estate. Eligible homes include a single-family home, condominium, two- to four-unit dwelling, or manufactured home.
To participate in these programs, you and any co-borrowers must be at least age 62. You also must have either little or no mortgage debt on your home (except for the middle program, above, which requires that you have no debt). There are no income requirements to participate in these programs. Since reverse mortgage loan payments are not considered as taxable income, your Social Security and Medicare benefits are generally not affected.
Another feature of these programs is that you are never obligated for more than the value of your home when it is sold.
Next Topic: Deciding to buy or rent
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