Considering A HUD Reverse Mortgage? Some Questions You Should Ask Yourself Before Deciding

A Home Equity Conversion Mortgage, often referred to as a HECM, FHA or HUD reverse mortgage, is fast gaining in popularity among seniors as a way to supplement their existing retirement fund. Although still occupying a niche sector within the loan industry, many financial experts expect this relatively new type of loan to form a large part of the lending industry in the coming years.

But, is such a loan right for you? Here are some important questions you should ask yourself before making any decision.

In summary, a HUD reverse mortgage is federally insured. Unlike a traditional mortgage, where the borrower must make monthly repayments to pay back a loan, the lender gives the borrower money. In return the lender puts a lien on the property.

With a traditional mortgage the borrower risks losing their home if they fail to keep up the monthly repayments. With a HECM, they are no monthly repayments so the borrower has no fears about losing their home. AS the borrower withdraws money, the equity in the home diminishes, however, the loan is FHA insured so that the borrower is guaranteed to receive the payments promised if the equity proves insufficient to cover the loan or the lender goes out of business.

The title deeds of the home stay with the borrower and never with the lender; another important difference between the two types of mortgage.

The loan is not payable until the property is no longer the borrower's principal residence, the borrower sells it, or dies. The borrower can remain living in their home for the rest of their lives receiving payments.

To be eligible, the homeowner must be 62 or older, have no mortgage (or a small amount remaining) and there are also certain restrictions on the type of home that qualifies. The borrower does not need to provide proof of income (because there are no monthly repayments) and does not need to have a health check.

Generally, the more valuable your home and the older you are, the more you can borrow.

This sounds great, and for many seniors it's a great way to supplement their retirement funds. However, there are some drawbacks. Firstly, the longer the borrower lives, the less equity will be left in the property; heirs may find that when they come to sell the property, there is little or no equity left.

Also, interest rates can rise and this increases the amount of the interest charged and this can also diminish the amount of equity in the property. There is currently one program that does offer a fixed rate.

So, before deciding on whether a HUD reverse mortgage is right for you, you should ask yourself these questions.

Would a better option be to downsize?

This can release more capital than a HECM and gives the borrower the flexibility of being able to relocate to where ever and whenever they want.

Do you plan to live in your home for the rest of your life?

A HECM really only makes sense for those who plan on staying put. The cost of closing down this type of loan can be expensive.

Could you raise the extra money through other means?

If you require money for a short-term objective, you may be better advised to opt for a home equity loan and then repay pay it over a short period of time. A HECM is more suited for those who want a regular monthly payment over the long term or a large, one-off lump sum.

How much will you get?

You can use one of the many online reverse mortgage calculators. Both AARP and Financial Freedom website provide one that is easy to use and simple to understand.

Do you need the loan now?

Remember, the older you are, the more you can borrow. So, if you don't require the money now, you're better off waiting.

There's now doubt that a HUD reverse mortgage can improve the quality of one's retirement years; you just need to be certain that this type of loan is your best option.

The above is a brief overview by Robin O'Brien from American Chronicle.