A reverse mortgage is a mortgage that allows older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. Those seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses can usually use the *equity in their home to make these improvements.
These loans are somewhat different than the conventional mortgage though. In a "regular" mortgage, you make monthly payments to the lender. However, in a "reverse" mortgage, you receive money from the lender and generally don't have to pay it back for as long as you live in your home. The loan must be repaid when you die, sell your home, or no longer live there as your principal residence. In 95% of the cases, these loans will not be repaid. Generally, once the homeowner dies or no longer will live in the home, the owner or heirs will have up to one year to pay off the mortgage. Otherwise, the home will be sold by the Lender.
In the last several years, the number of reverse mortgages has grown significantly. This is most likely due to the lack of funds that are needed to fund living expenses, coupled with the lack of Social Security and smaller pensions that just do not seem to be enough for most. A reverse mortgage can help make ends meet or do the things they would like to do without worry of the cost.
It is important to consider this type of mortgage carefully, though. Like any other mortgage, you are taking out an amount of money on your home's value. It is often a costly thing to do simply because of the fees involved. But, for many, there is no reason not to consider a reverse mortgage.
BASIC TYPES OF REVERSE MORTGAGES
Single-Purpose Reverse Mortgages. These are offered by some state and local government agencies and nonprofit organizations. Single-purpose reverse mortgages generally have very low costs. But they are not available everywhere, and they only can be used for one purpose specified by the government or nonprofit lender (e.g., to pay for home repairs, improvements, or property taxes). In most cases, you can qualify for these loans only if your income is low or moderate.
Federally Insured Reverse Mortgages. Also known as Home Equity Conversion Mortgages (HECMs), which are backed by the U. S. Department of Housing and Urban Development (HUD); and Proprietary Reverse Mortgages, which are private loans that are backed by the companies that develop them.
HECMs and proprietary reverse mortgages tend to be more costly than other home loans. The up-front costs can be high, so they are generally most expensive if you stay in your home for just a short time. They are widely available, have no income or medical requirements, and can be used for any purpose.
The amount of money you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.
The HECM gives you choices in how the loan is paid to you. You can select fixed monthly cash advances for a specific period or for as long as you live in your home. Or you can opt for a line of credit, which allows you to draw on the loan proceeds at any time in amounts that you choose. You can also get a combination of both monthly payments plus a line of credit.
LOAN FEATURES
Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable. As you consider a reverse mortgage, be aware that:
- Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender generally sets these fees and costs.
- The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
- Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions.
- Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A "nonrecourse" clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid.
- Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don't pay property taxes or maintain homeowner's insurance, you risk the loan becoming due and payable.
- Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
*Equity is a term that describes the value of the home minus any mortgages or liens that are being held against it. The equity of a home goes up as the mortgage of the home is paid down. When the home is completely paid off, the equity of the home is the same as the home's value on the market.
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