Recently, I have been asked about Reverse Mortgage.
What is it? How does it work?
If you’re age 62 or older and are "house-rich, cash-poor”, a reverse mortgage may be an option to help supplement your income. However, because your home is such a valuable asset, you may want to consult with your family, attorney, or financial advisor before applying for a reverse mortgage. Knowing your rights and responsibilities as a borrower may help to minimize your financial risks and avoid any threat of foreclosure or loss on your home.
A reverse mortgage is a loan where a lender pays you a monthly advance, a line of credit, or a combination of both while you continue to live in your home. The amount you’re eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging. Funds you receive from a reverse mortgage may be used for any purpose.
With a reverse mortgage, you retain title to your home. You are responsible for maintaining your home and paying all real estate taxes. Depending on the plan you select, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. When you die, the lender doesn’t take title to your home, but your heirs must pay off the loan. Usually, selling the home or refinancing the property repays the debt.
Reverse mortgages are rising-debt loans. The interest is added to the principal loan balance each month, because it’s not paid on a current basis. The amount you owe increases over time as the interest compounds. Some reverse mortgages have fixed rate interest; others have adjustable rates that can change over the lifetime of the loan.
Reverse mortgages use some or all of the equity in your home, leaving fewer assets for you and the your heirs.
The three types of reverse mortgages ~ FHA insured, lender-insured, and uninsured ~ vary according to their costs and terms. Check the features of each to select the type that is best suited for your needs. Before considering a reverse mortgage, consult with family members, your attorney, or financial advisor.
Reverse mortgages typically charge loan origination fees and closing costs. Insured plans charge insurance premiums and some plans have mortgage servicing fees. You may be able to finance these costs if you want to avoid paying them in cash. But, if you finance the costs, they will be added to your loan amount and you will pay interest on them.
Your legal obligation to repay the loan is limited by the value of your home at the time the loan is repaid. This would include any appreciation in the value after your loan began.
There are various reverse mortgage plans offered. Consult your attorney or financial advisor about the tax consequences of the particular plan you’re considering.
The Federal Truth in Lending Act (TILA) is one of the best protections you have with a reverse mortgage. TILA requires lenders to disclose the costs and terms of reverse mortgages. This includes the Annual Percentage Rate (APR) and payment terms. If you choose a credit line as your loan advance, lenders also must tell you of charges related to opening and using your credit account.
You are entitled to counseling from a federally-approved reverse mortgage counselor if you apply for a reverse mortgage, so be sure to take advantage of that!
** Information supplied by The Washington State DEPARTMENT OF FINANCIAL INSTITUTIONS (DFI)