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Is Reverse Mortgaging Your Future?

Over the years, my wife and myself have had plenty of ideas for growing our nest egg, because to truly enjoy retirement, we need enough money socked away to settle our children comfortably and ourselves live comfortably and relatively stress free. But had we achieved in full is a different question altogether! We won't need nearly as much cash as most money mavens would have us believe. But our nest egg - if only combined with some Social Security and pension checks, could fund the kind of lifestyle we'd like. And in the absence of the same in India, do we have still some other alternatives?

Is the Reverse Mortgage a solution?

These days many elderly Indians have started cashing in their sweet homes accomplished with all interests they richly deserve. I mean cashing in on their equity. How clever they are?

Whether you retire on superannuation or voluntarily( VRS), better consider a business of your own. One of the best ideas for retirees looking for extra income is to create an Ace in the Hole, a small part-time business that can provide one with a stash of cash to help you fill in those gaps and save on taxes at the same time.We've the same difficulty with heavy property taxes and outgoings on the new flat we've chosen.

Another option that's a personal favourite of mine and I claim the best ever is to downsize the lifestyle. How we can cut our costs considerably? But the sooner you do scale back, the more money we'll be able to sock away, and the less we'll need - year after year after year.

We can also fill in the gap by tapping into what may well be our largest asset - our home. If we've been paying on our home loan, we'll have burnt our mortgage agreement long before we run towards the risk. And here comes the Reverse Mortgaging proposition.

Your Own ATM

Once we actually own our home, we can turn it into an ATM (A Ton of Money)! We can sell, then buy or rent a less expensive house, and use the difference to help fund our retirement. Or if we still want to stay where we are, we can go in for RM, a borrowing option that we've been hearing more and more over the past few years.

But let's be forewarned: Dewan Housing, the first to offer reverse mortgage plan in India, realised "the great potential market for reverse mortgages is enormous and yet remains largely untapped." Their offer, I found not attractive at all. I have been advising elders then to exercise extreme caution.

It isn't Like some advertisement appears in a TV commercial, saying:

"Imagine going to the movie, and instead of handing over cash, you get some cash back in your hands"! And you don't have to sell your home to do it, just mortgage! Just come to the Cash Boutique "Sounds good, doesn't it?

Remember it's possible if only we own our home 'free and clear'! And you're at least 60, a RM will let us borrow against our home equity. Just like a regular, old-fashioned mortgage, the company (Dewan Housing) gets a lien on our home in exchange for lending us money - conceivably for as long as we (both you and your spouse) live. Fine. If instead we live in a CHS with conveyance yet to be done (as in most cases in Mumbai), sorry, we're out of luck.

We can get the money in a lump sum, in monthly payments, as a line of credit to draw on when needed, or as a combination of some or all of the above. Sounds fine. Doesn't it?

Under some RM options, the line of credit grows, under others it doesn't. In general, how much you can borrow depends on how much the home is worth and your age. The younger you are, the less you'll be lent.

Now we're in USA where the scheme is quite popular. Yet not without blemishes! Hence a thought of writing this essay. Here for example, it's estimated that a 65-year old can borrow up to 26% of a home's value, a 75-year old, 39%, and an 85-year old, 56%. Say your house is worth $125,000. Using percentages, you'd get a loan for $32,500 if you're 65, $48,750 if you're 75, and $70,000 if you're 85.

No matter what your age, your house won't have to be sold, and the loan won't have to be repaid ... generally until you no longer occupy it, either because of a permanent move on this earthly plane or to another. When that happens, if the loan - plus accrued interest - is for more than the house sale fetches, the lender eats the loss. Anything left over, on the other hand, would go to his heirs.

You Better Take Notes

RM has so many permutations, conditions, and costs that lenders must send potential borrowers to a counseling session run by a government or non-profit organisation. For a list of approved counseling agencies in your area, ask lenders, call your local office for the aging, NGOs like Dignity Foundation, Harmony Foundation, Silver Innings Foundation et al. In India, now many PS Banks have come forward with a better schemes. If you're thinking of joining the many people who have already taken out RM, you'd be very wise to have someone accompany you to the session. Or if you have a parent contemplating a RM, you better go along. In either case, it's a good idea to get counseling early in the process. Or you might be trying to help a friend figure out how to advise his elderly house-rich-but- otherwise- broke aunt. Or maybe your home could be purchased by your kids and/or other relatives, or someone else who will give you a guarantee that you can stay there for the remainder of your life (known as life tenancy).

While the counseling session will help, RM options are so complicated that you'll probably need far more information and perhaps expert help (say, from an accountant) to really think through your alternatives. Before signing up for a reverse mortgage, you must research all your options from this perspective: how can you get the best loan - for you - at the cheapest price?

Statutory Warning:

RMs usually carry high to very high upfront fees. And the point to note is that if the loan is held for only a few years, its cost could be extremely high.

But a reverse mortgage may be a blessing to those whose homes are perhaps their only significant asset, who need cash to make ends meet, and who don't feel they need to leave the home to their heirs.

Note:

* You must be able to keep up with Property Taxes and insurances bills on your home. * The greatest amount of risk especially for younger borrowers is that they may live longer than expected and drain all available equty from their homes.

Moral:

"If you borrow the money now, you may not have it when you need it later on".

Tail Piece:

I would like to explain the state of affairs here in USA. You could extrapolate as things apply there in India. The recession hasn't spared any age group. It could be particularly brutal for the elderly here. Increasing number of citizens are bing lured into RM, which presents ssentially a cash advance on their equity. Loans are available to those who are 62 and above.

Lenders have to eat the difference if a hom ends up declining in value. RM like some flavours of the infamous cash for now subprime mortgages, are too complex for many innocent seniors to unravel the myths. The Amount you can borrow is based on the interest rates, your age and the market value of your home.


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