Reverse mortgage is not like a refinance, equity loan or a second loan on your home and there are some pitfalls.

So what is a reverse mortgage?

As the term implies the flow of money is reversed. Instead of the homeowner paying the lender on a predetermined schedule, the lender pays the homeowner and there aren抰 any payments due until the home owner moves or dies.

How did reverse mortgage start?

Roger Maris broke Babe Ruth抯 single-season home-run record in 1961 but like most things in life, a single act of kindness has a much longer longevity and a more widespread influence than that of fame and ironically these acts of kindness remain obscure.

The history of reverse mortgage can be traced to Nelson Haynes of Deering Savings %26 Loan (Portland, ME) who made the first reverse mortgage loan to Nellie Young, the widow of his high school football coach. This event was reported to be motivated by kindness and started a chain of events over the following forty years to extend a helping hand to today抯 retirees.

Reverse mortgage helps many retirees cope with their financial difficulties and more importantly have a way to retain their independence and dignity. And retirees are reaching for this solution in record numbers. According to the National Reverse Mortgage Lenders Association in 2004, lenders originated a record 37,829 HECM loans during the most recent federal fiscal year - a 109 percent increase over the 18,079 loans closed the previous year.

Why would a lender do this?

The act of kindness may have started this idea but lenders are not charitable organizations and they will not be in business long if they don抰 have a return on their investments. In this case, they calculate the amount they lend based on the value of your home, projected appreciation, your age and a number of other factors. They expect to get paid the money they have lend plus the interest when the homeowner moves or dies.

What are HECM Loans?

Federally-insured home equity conversion mortgage (HECM) is the most common of reverse mortgage loans that the U.S. Department of Housing and Urban Development started offering in 1989.

Who cares about federal insurance?

In traditional loans, when you borrow the money, you have the cash in hand and the lender has taken all the risk secured by your home. However in a reverse mortgage you may plan to receive a monthly payment over a period of time. What will happen if the lender is no longer around to pay you?

This is why the federally insured reverse mortgage ads another dimension of safety and peace of mind. This peace of mind also comes with a price tag. HECMs limits the maximum loan amount a homeowner can borrow.

What about Non-HECM?

Many lending institutions offer this category of reverse mortgages and their limits are usually higher than that of HEMD. However they are not federally insured and they can have a much higher expense associated with their processing.

Can any one qualify for a reverse mortgage?

The eligibility requirements for a reverse mortgage are:

• You are a homeowner
• You are 62 years of age or older
• You own your home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan
• You live in the home
• In case of HUD, you are also required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan. You can contact the Housing Counseling Clearinghouse on 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency and a list of FHA approved lenders within your area.
• Upkeep of property taxes and staying out of bankruptcy are also required.

How much money can I borrow?

The amount of money you can borrow is based on a different set of formulas than the traditional mortgage qualifications. Your age, the value of your home, the current interest rates, the loan costs impact the amount. Older individuals with more valuable homes in lower interest rate environment can borrow more.

What types of homes are eligible for reverse mortgages?

Single family, two-to-four unit properties, townhouses, detached homes, units in condominiums and some manufactured homes are eligible. However various restrictions apply to all with most significant being that you own them, live in them and have kept them in reasonable condition.

What about my heirs?

If death occurs while you still owe money to the lender, your heirs are obligated to pay the borrowed amount, plus interest and other fees, to the lender. They usually do this by selling the house. Whatever remains after paying the lender belongs to your heirs. The loan cannot be passed along.

What are my borrowing options?

You have five options:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term - equal monthly payments for a fixed period of months selected.
• Line of Credit - unscheduled payments or in installments, at times and in amounts of borrower's choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.

What about reverse mortgage scams?

Like most other scams directed to senior citizens, telemarketing is on top of the list. Never agree to anything over the phone, especially on the first call and do not give personal information, financial or otherwise, over the phone.

There is never a cost associated with getting information on reverse mortgages. This information is available for free. Ask for written copy of everything that should include and address and a phone number so that you can confirm the data.

DISCLAIMER: Vishy Dadsetan, FreeCreditReport.ws or My Favorite Shop, Inc. do not endorse any reverse mortgage product or lender. This article and website does not provide legal, accounting, or other professional services. If legal or other expert assistance is required, the services of a competent professional should be sought. Although Vishy Dadsetan has made every effort to ensure the accuracy and completeness of the information contained in this site, it assumes no responsibility for errors, omissions, inaccuracies, or inconsistencies.

For more information about mortgage loans, reverse mortgage, and mortgage refinancing checkout MyPersonalFinance.com

What is the most critical question to ask myself when refinancing a home?
Is refinancing going to put you in a better position financially? Will refinancing reduce your monthly expenses, meet a critical family requirement, or improve your investment portfolio? If the answer is yes, it is probably a good time to refinance.

What is a cost benefit analysis?
This is a detailed account of the actual cost of refinancing and helps provide the best financial decision. Cost-benefit analysis analyzes the cost effectiveness of different alternatives in order to see whether the benefits outweigh the costs When you look at the actual costs of refinancing, determine how long it will take to recoup costs. Is it worth it?

A qualified mortgage professional should review your alternatives and help you determine if the benefits outweigh the near and long term costs. The rule of thumb regarding the cost vs. benefit of refinancing is that you need a 1- 2% "spread" between your existing interest rate and today's current rates. Refinancing, No Cash-Out option can reduce your monthly mortgage payment or reduce the remaining term of your loan and thus probably save tens of thousands of dollars in interest over the long-run. Cash-Out withdraws cash (reduces equity) for home improvement, educational tuition, debt consolidation or for such purchases as a investment property or second home, auto, or other major purchase.

How often should I refinance?
Some people refinance frequently but a rule of thumb should be that you have held the property for one year. Refinancing allows the homeowner to use the home to conduct transactions that allow opportunities and possibly enhance the homeowner抯 asset pool or reduce the financial short-term burden of the homeowner. How the homeowner approaches the refinance is critical to long-term financial net worth. If the homeowner is utilizing the home as a second checking account to payoff consumer debt, financial stability for future years is reduced through ineffective money management by reducing the homeowner抯 equity. The ability for the consumer to build equity is in essence a long term subtle retirement plan for the homeowner.

What are some questions I can ask the mortgage company or the bank handling my refinancing?
The scope of financial knowledge a mortgage consultant or loan officer possesses matters in this transaction. This person should have a thorough knowledge of money and how it works. Begin by asking about their professional credentials. The best mortgage professionals will have formal business education, professional experience in the financial industry, and the institutional knowledge to place you in the right product. At Breakwater Mortgage in Virginia Beach, we select our mortgage consultants, loan officers, and loan originators based on strengths in these areas. Often lenders, banks, and other mortgage companies do not conduct a detailed review of potential employees that will handle your most important asset. Ask your mortgage professional why they are recommending a certain loan product to you. You should also feel free to ask personal questions such as: Do you own a home? What type of mortgage do you have? What is your credit score? The answers will reveal information about their money management. If you do not feel comfortable with your mortgage professional, research a qualified individual who will help you based on your needs. It抯 worth it to take the time to find the right mortgage professional.

Does location of the home matter when considering refinancing?
Yes, it matters a great deal. Some real estate markets have reached their peak. Do not refinance at the top of the market. Research and see how quickly homes are selling in your area. Contact your local professionals regarding home values in your market. They will be able to give you their opinion, home comps, assessments of home value trends in your area. I recommend you leave 10-15% equity in your home when you refinance. A reputable mortgage broker or lender will recommend that you keep some equity in your home so you can sell your property if situations dictate.

Does the type of mortgage I have affect my refinancing decision?
Absolutely. Talk to a qualified mortgage professional first, before you make your decision. That person will help you compare your current mortgage rate/product to current market rates, available mortgage terms, and types of mortgages available based on your discussions. I look at mortgage products based on an indebt analysis of the clients needs. With that in mind, some general rules apply. If rates are falling, I would advise a homeowner to stay in their current loan until a 2% spread between their current loan and future refinance loan. If a client has a loan product that adjusts downward during a period of decreasing rates, I recommend they stay with that product until a projected rate increase period that will increase over a protracted period. When rates start to increase, and are projected to continue to increase, I would advise a homeowner with a loan product that adjusts, when rates adjust, to move towards a fixed mortgage product (7, 10, 15 or 20 year mortgage depending upon an individual抯 situation). If the homeowner is geographically displaced due to employment, say five years or less, a long-term fixed mortgage is not the optimal product. If the homeowner plans to stay in a specific geographical area and in that same home for a long period of time, I抎 recommend a long-term fixed rate product and possibly a home owner抯 line of credit (HELOC) to supplement the homeowner抯 financial decisions. With long-term mortgages a homeowner can still opt to pay more on the principal, reducing the term of the loan and interest costs.

What are economic indicators that bode well for refinancing?
A knowledgeable mortgage professional should understand economic indicators, and will be able to give you an accurate assessment on whether to refinance or not. Are interest rates rising or falling? With refinancing, timing is everything. If rates are falling and they are lower than your mortgage rate (a general rule is 1 ?2 % lower then your current fixed rate), it could be a good time to refinance. If not, it might be a better idea to sit tight and forgo refinancing for now.

Jay R. Popejoy's educational background in financial and mortgage lending includes B.S. Degrees (Marketing/Business Education)and a M.B.A. program (current studies). Jay has 19 years of professional experience involving banking and finance, logistics management, civil affairs, and international development. Former and present employers include HSBC and Household/Beneficial Finance. Jay R. Popejoy is currently Managing Director of Breakwater Mortgage Corp. in Virginia Beach and Williamsburg, Virginia, and is a senior staff officer for the US Army (Army Logistics). E- mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit http://www.breakwatermortgage.com for more informaiton.