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Many older Americans are turning to
“reverse mortgages” to pay for medical treatment, finance a home
improvement, buy long-term care insurance, or supplement their
income. Reverse mortgages allow older consumers to convert the
equity in their homes to cash while retaining home ownership.
With a “regular” mortgage, you make monthly
payments to the lender. But with a reverse mortgage, you receive
money from the lender and generally do not have to repay it for
as long as you live in your home. In return, the lender holds
some of your home’s equity. The proceeds of the loan are
tax-free, there are no minimum income requirements, and for most
reverse mortgages, the money can be used for any purpose.
However, a reverse mortgage may be more costly, so if you are
considering a reverse mortgage, it’s important to understand how
the loans work and what your rights and responsibilities are.
Types of Reverse Mortgages
- The federally insured Home Equity
Conversion Mortgage (HECM), administered by the Department
of Housing and Urban Development (HUD)
- Single-purpose reverse mortgages,
usually offered by state or local government agencies for a
specific reason
- Proprietary reverse mortgages, offered
by banks, mortgage companies, and other private lenders and
backed by the companies that develop them
Qualification for a Reverse Mortgage
You must be at least 62 and have paid off
all or most of your home mortgage. Income is generally not a
factor, and no medical tests or medical histories are required.
If you seek an HECM, you must participate in mortgage counseling
from an independent government-approved “housing agency.”
Financial institutions offering proprietary reverse mortgages
may require similar counseling or homeowner education.
The amount you can borrow depends on your
age, the equity in your home, the value of your home, and the
interest rate. You can be paid in a lump sum, in monthly
advances, through a line of credit, or a combination of all
three. Federal law limits the maximum amount that can be paid
out for an HECM.
Common Features
- Reverse mortgages generally do not
affect Social Security or Medicare benefits.
- Most plans allow homeowners to retain
title to their homes until they permanently move, sell their
home, die, or reach the end of a pre-selected loan term.
- Generally, a move is considered
permanent when the homeowner has not lived in the home for
12 consecutive months. So, for example, a person could live
in a nursing home or other medical facility for up to 12
months before the reverse mortgage would be due.
- Reverse mortgages tend to be more
costly than traditional loans because they are rising-debt
loans. The interest is added to the principal loan balance
each month.
- Reverse mortgages use up all or some
of the equity in a home. That leaves fewer assets for the
homeowner and his or her heirs.
- Lenders generally charge origination
fees and closing costs; some charge servicing fees.
- Interest on reverse mortgages is not
deductible on income tax returns until the loan is paid off
in part or whole.
- Because homeowners retain title to
their home, they remain responsible for taxes, insurance,
fuel, maintenance, and other housing expenses.
Shop Around and Compare Terms
- Annual percentage rate (APR), which is
the yearly cost of credit.
- Type of interest rate. Some plans
provide for fixed rate interest; others involve adjustable
rates that change over the life of the loan based on market
conditions.
- Number of points (fees paid to the
lender for the loan) and other closing costs.
- Total amounts loan cost (TALC) rates.
The TALC rate is the projected annual average cost of a
reverse mortgage, including all itemized costs. It shows
what the single all-inclusive interest rate would be if the
lender could charge only interest and no fees or other
costs.
- Payment terms, including acceleration
clauses. They state when the lender can declare the entire
loan due immediately.
- Choose your lender carefully as well.
Look for the successful track record, size and strength of
the financial institution.
Under the Federal Truth in Lending Act,
lenders must disclose these terms and other information before
you sign the loan. For plans with adjustable rates, they must
provide specific information about the variable rate feature. On
plans with credit lines, the applicant must be informed about
appraisal or credit report charges, attorney’s fees, or other
costs associated with using the account. Be sure you understand
these terms and costs.
Reverse mortgages come with different
provisions. For example, with some reverse mortgages, the lender
may take a share of equity appreciation. This could create
issues for the homeowner or heirs, particularly if the value of
the home rises unexpectedly during the loan. Carefully read any
provision of the contract about shared appreciation.
You generally have at least three business
days after signing a reverse mortgage contract to cancel it. The
cancellation must be in writing. For more information on this
topic, visit the Federal Trade Commission website at
www.ftc.gov
or the web-site for the U.S. Department of Housing and Urban
Development at www.hud.gov. |
