Get the Facts About Reverse Mortgages So You Can Decide If They Are the Right Solution For You
Reverse Mortgages are a means for individuals who are 62 years of age and older to convert their equity into cash or an ongoing income stream while still retaining ownership of their homes for as long as they are living in that home.
There are many reasons why people turn to Reverse Mortgages as a source of cash or ongoing supplemental income. Some do it to pay for medical care. Some use it to finance home improvements or pay for travel and vacations. Some rely upon it as a means of supplementing their social security and/or pension income.
A reverse mortgage is the opposite of a regular mortgage. Instead of making regular monthly payments to a lender, with a reverse mortgage you receive money from the lender but don't have to repay it for as long as you live in your home. You can elect to be paid in a lump sum, in monthly advances, through a line of credit, or a combination of all three.
Reverse mortgages can be a way for homeowners who are 62 years or older and who have paid off their homes (or almost paid them off) to take that equity out in order to better enjoy their retirement or meet financial obligations. The monies received from these reverse mortgages are tax-free, have no minimum income requirements, require no medical examinations, records, or tests, and can be used for almost any purpose.
Reverse
mortgages are typically more costly than other types of mortgage loans. Furthermore, there have been cases of abuse by unscrupulous lenders... like the scam shown in the video below.
The Basics of Reverse Mortgages
There
are several 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.
If you
seek an Home Equity Conversion Mortgage, you must undergo free mortgage counseling
from an independent government-approved "housing agency."
Financial institutions offering their own reverse mortgages
usually require similar counseling or homeowner education.
Common Features of A Reverse Mortgage
Depending on the plan, reverse mortgages
generally 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.
However, be
aware that:
- 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. So, the total amount of interest owed
increases significantly with time as the interest compounds.
- 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. How much is up to the lender.
- 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.
Getting a Good
Deal
If you decide to
consider a reverse mortgage, shop around and compare terms. Look
at the:
- 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 loan term based on
market conditions.
- number of points (fees paid to
the lender for the loan) and other closing costs. Some lenders
may charge steep costs, which your lender may offer to
finance. However, if you agree to this, you'll take out fewer
proceeds from the loan or you'll borrow an extra amount, which
will be added to your loan balance and you'll owe more
interest at the end of the loan.
- total amount 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.
Under the
federal Truth in Lending Act, lenders must disclose these terms
and other information before you sign the loan. On plans with
adjustable rates, they must provide specific information about
the variable rate feature. On plans with credit lines, they must
inform the applicant about appraisal or credit report charges,
attorney's fees, or other costs associated with opening and
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.
Also, be
cautious about reverse mortgages offered by door-to-door and
other home solicitation lenders. There have been various
problems with these types of lenders. Some of the problems have
involved steep points and loans that primarily seek to take the
owner's equity.
You generally
have at least three business days after signing a reverse
mortgage contract to cancel it. The cancellation must be in
writing. |
