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Posted On: 11/07/2012

QUESTION:

We have a reverse mortgage and would like to sell our house. The property will likely sell for about $225,000. Combine the $208,000 balance on our reverse mortgage with marketing expenses and closing costs, and it’s likely that we will not get enough to pay off the loan. What can we do?

ANSWER:

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A reverse mortgage is a loan that allows people age 62 and older to borrow money against the equity in their homes. There is no monthly cost for principal or interest, however, owners must still pay their property taxes and insurance. Many people have used reverse mortgages to lower monthly living costs by paying off an existing home loan.

However, reverse mortgages are complex financial creatures. They are negatively amortizing loans, meaning that unpaid monthly interest is added to the debt so the principal balance grows over time. Payment is generally due when the borrower dies or moves, but the lender’s claims are restricted to the sale value of the property.

The borrower’s limited liability is made possible because most reverse mortgages are FHA-insured. If the value of the house is not large enough to repay the debt, then the FHA steps in and covers any balance owed to the lender.

The National Reverse Mortgage Lenders Association (www.reversemortgage.org) tells us that “with a FHA-insured reverse mortgage, no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.”

For specifics, contact your lender and work through the numbers for a model sale. Ask what happens if the sale price is less than the appraised value, and what permissions you may need in advance.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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