Sunday, January 15, 2006

mortgages, reverse

A reverse mortgage, or home-equity conversion, is one way to increase income during retirement, but financial managers advise that such a plan should be adopted only after careful consideration of financial alternatives. Monthly payments are received by the homeowner for a negotiated period of time. When the home is sold, usually upon the death of the owner, principal and interest are deducted from the sale. Home-equity conversions are only practical for an older person who owns a home that is fully paid for or has only a small remaining mortgage. Three variations of home-equity conversions are: reverse annuity mortgages (RAMs), sale/leasebacks, and deferred payment loans.
Reverse annuity mortgages (RAMs) are usually limited to 60 percent to 80 percent of the appraised value of the property with a fixed interest rate for a set number of years, e.g., 10 years. The homeowner would receive a monthly income for the duration of the loan. At the end of that period of time, the loan must be renegotiated or repaid in full.
In a sale/leaseback agreement, an investor purchases the home and grants the seller life tenancy in the home or the right to tenancy for a fixed number of years at a specified rent. Payment is received in one of several ways: a lump sum, equal monthly payments, or monthly mortgage payments from which rent is deducted.
The deferred payment loan is another way homeowners can draw on the equity built up in their home for use to maintain and repair the structure. This type of loan allowed the homeowner to defer payment of both principal and interest, either for a specified period of time or until the home is sold.
It is extremely important to investigate these options by seeking legal advice or by talking to a reputable financial consultant. The Federal Council on Aging (FCA), an advisory panel to the president, recommends that all these loan arrangements should involve a lawyer and the homeowner's potential heirs, since a reverse mortgage agreement may drastically reduce or eliminate the estate the family may inherit.
Averyt, A. Successful Aging. New York: Ballantine Books, 1987.

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