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Reverse mortgages are not a rip-off

Question: My 73-year-old mother is considering a reverse mortgage. She asked me to assist her. Her home equity is about $300,000.

She talked to a salesman from Transamerica and a mortgage broker who represents Fannie Mae and FHA. Each reverse mortgage lender has a different plan. Transamerica was particularly confusing because they offer an annuity that pays as long as she lives even after she moves out and sells her house.

Do you think reverse mortgages are a rip-off?

Answer: No. Reverse mortgages serve a need of the elderly for more retirement income so they can remain in their homes.

You might think that reverse mortgages are a rip-off because your mother will be spending your inheritance by getting a reverse mortgage. but she does not owe you any inheritance. It's her home equity to enjoy any way she wishes.

Reverse mortgage lenders deserve to earn profits for the risk they are taking. For example, if your mother lives to be 110, her reverse mortgage lender must keep paying her even if there is no home equity left, but, if she dies in just a year or two, then the house is sold, the reverse mortgage lender is paid off, and the equity left is part of your mother's estate.

The best way to evaluate reverse mortgages is to compare the Total Annual Loan Cost (TALC) rate for each lender. The TALC includes all costs of a reverse mortgage.

Each lender must tell your mother the TALC for the first two years of the reverse mortgage at her life expectancy and at 40 percent beyond her life expectancy. However, the two-year TALC is distorted because of up-front loan fees.

More details are in my special report "How Senior Citizens Can Select the Best Reverse Mortgage for Tax-Free Income" available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010.

Delinquency deadline

Question: I hold a second mortgage of about $18,000 on the house I sold about two years ago. The borrower got laid off from his job but expects to be called back soon. He is now three months behind on his mortgage payments to me.

How long must I wait before taking action?

Answer: You've already waited too long. If my borrowers miss a payment, when their second payment comes due 30 days later I begin the foreclosure procedure. Of course, I immediately contact the borrower after 15 days to find out why the payment hasn't been received.

I have one borrower with nine children! I don't know how he supports them, but every month he makes his mortgage payment to me within 15 days of the due date. It took me a while to get him shaped up, but now my mortgage payment is his top priority.

Ask a local real estate attorney to handle the simple procedure to begin foreclosure. If you let your borrower get behind, he won't be able to recover.

Surely, in our booming economy with "help wanted" signs everywhere, he can get a part-time job to earn income to pay you each month. If not, you'll get the foreclosed house back to resell for a second profit.

FHA vs. VA loan

Question: I am eligible for either a VA or FHA home loan. Which is better?

Answer: The big VA mortgage advantages are no down payment and higher loan limits than FHA loans. Please check with a local VA-FHA lender to discuss all the pros and cons of each loan type.

Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of the Tribune Media Syndicate, c/o the Times, 435 N Michigan Ave., Suite 400, Chicago, IL 60611. Questions of general interest will be answered in the column.