Gee, that sounds great! But you need to know what you’re doing!
No matter why you need the money: home improvements, paying off your mortgage, supplementing retirement income, paying medical bills, even setting yourself up as an SBO (that’s small-business owner to the uninitiated) more and more Americans are being drawn to “reverse” mortgages.
Sure, the blandishments of those avuncular TV pitches make them sound good; but if you have the feeling you need to know more before cashing in your home equity: go to the head of the class!
Here’s How They Work
Unlike a “regular” mortgage, where you make monthly payments to a lender; in a “reverse” mortgage, the lender pays, and you typically have no need to repay that money as you live in your home, reverse mortgages allow older homeowners to convert part of their home equity to cash, an income stream or line of credit without selling their homes, or becoming bogged down with yet another monthly bill. However, the loan has to be repaid when you die, if you sell the place, or move. Reverse mortgages can help high-equity; cash-poor homeowners stay in their homes with enough income to cover their debts and expenses.
You must be at least 62 and live in your home to qualify for a reverse mortgage. The money is generally tax-free, and many of these arrangements have no income limitations. The amount you can borrow depends on several factors, including age, type of reverse mortgage selected, the home’s appraised value and location, and current interest rates. In general, the older the borrower, the more valuable the home, and the less still owed on it, the larger the reverse mortgage that will be available.
Types of Reverse Mortgages
The three basic types of reverse mortgage are worth exploring:
• Single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations, these generally have low costs, but are not available everywhere, and can only be used for the purpose specified by the government or nonprofit lender, such as home repairs, home improvements or property taxes. In most cases, low-income homeowners will qualify.
• Federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), are backed by the U. S. Department of Housing and Urban Development (HUD), and account for 90 percent of reverse mortgages made in the U.S. Typically more costly than other home loans, HECMs’ high up-front costs also make them the most expensive reverse mortgage, especially for those only staying in their homes a short while They are, however, widely available, can be used for any purpose, and have no income or medical requirements.
• Proprietary reverse mortgages are private loans backed by the companies that develop them. Generally the most expensive reverse mortgages, those living in higher-valued homes might be able to get more cash from a proprietary plan than from a single-purpose or HECM, while costing less than a HECM in the early years of the loan. Proprietary reverse mortgages may be used for any purpose, however, and have no income limits. But it pays homeowners to compare the relative costs and benefits of proprietary loans to those of HECMs.
To help senior homeowners make informed decisions about reverse mortgages, borrowers are required to receive consumer education counseling from a HUD-approved HECM counselor before applying or making any commitments. The counselor will explain the loan’s costs, financial implications, and alternatives. For example, counselors are obligated to tell borrowers about any government or nonprofit programs for which they may qualify, and any single-purpose or proprietary reverse mortgages available in the area.
The HECM allows borrowers to choose how the loan is paid: fixed monthly cash advances for a specific period or for as long as you live in your home, a line of credit you can tap into whenever you chose or a combination of monthly payments plus a line of credit.
Reverse mortgages are not taxable, and generally have no effect on Social Security or Medicare benefits. Homeowners retain title to the home and make no monthly repayments, but the loan must be repaid when the last surviving borrower dies, sells the place, or no longer uses it as a principal residence. In the HECM program, borrowers can live in nursing home or other medical facilities for up to 12 months before the loan becomes due and payable.
What Else Do You Need to Know About Reverse Mortgages?
• Many of the costs of obtaining a home purchase loan or refinancing an existing mortgage apply to reverse mortgages. For example, borrowers can expect to be charged an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain other standard closing costs Most of these are capped and may be financed as part of the reverse mortgage.
• Your total debt increases over time as loan funds are advanced and interest is charged on the outstanding balance, adding to the amount owed each month.
• Reverse mortgages may have fixed or variable rates, though most variable rates are tied to a financial index, which can change as market conditions fluctuate.
• Reverse mortgages can pull some or all of your home equity, leaving fewer assets for you and your heirs. However, “no recourse” clauses in most reverse mortgages prevent you or your estate from owing more than your home is worth when the loan is repaid.
• Because you’re retaining title to your home, you’ll still responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. Failing to pay property taxes or maintain homeowner’s insurance could mean your loan will become due and payable.
• Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
Homeowners Should Think Twice About a Reverse Mortgage If…
• You intend leaving your home to your children or other heirs free and clear;
• You have access to other, less costly ways of reaching your financial goal: a reverse Mortgages can be expensive.
Shop Before Buying
If you’re in the market for a reverse mortgage, shop! Compare terms and options. Learn as much as you can before talking to counselors or lenders: then weigh several alternatives. Come to any meeting with a list of questions that can land the best possible deal. Be careful of anyone trying to sell you something like an annuity, or suggests a reverse mortgage would be an easy way of paying for it.
Reporting Possible Fraud
Suspect someone is violating the law? Let your reverse mortgage counselor, lender, or loan provider know. Then, file a complaint with your state Attorney General’s office or state banking regulatory agency, and The Federal Trade Commission (FTC). That can be done online at ftc.gov or by phone, toll-free, at 1-877-FTC-HELP (1-877-382-4357).
• AARP, Reverse Mortgages.
• Federal Trade Commission, Reverse Mortgages: Get the Facts Before Cashing In On Your Home’s Equity.
• U.S. Department of Housing and Urban Development (HUD, Top Ten Things to Know if You’re Interested in a Reverse Mortgage.
• U.S. Department of Housing and Urban Development (HUD, Reverse Mortgages for Seniors,
Bill Willard is a freelance writer in Clearwater FL. Email him y email@example.com,
Call 727 724-8338, or visit his Website at http://www.writergazette.com/WillardAssociates.shtml
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