In a reverse mortgage, the consumer receives money from the lender and generally does not have to pay it back for as long as he or she lives in the home. Instead, the loan must be repaid upon death, sale or when the consumer no longer lives there as a principal residence.
Whether seeking money to finance a home improvement project, pay off a current mortgage, supplement retirement income or pay for health care expenses, many older Americans are turning to “reverse” mortgages. They allow 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.
In a “regular” mortgage, you make monthly payments to the lender. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations. Unfortunately, the initial and monthly charges assessed with a reverse mortgage can be high.
To qualify for most reverse mortgages, you must be at least 62 years of age and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions. Reverse mortgages are complex. One in 10 reverse mortgages end in default.
Is a reverse mortgage right for you?
The amount you are charged for origination fees and other closing costs, along with the monthly loan insurance and servicing fees, will significantly decrease the amount you can borrow.
The amount you owe grows with each month that passes and with each set of monthly fees and interest that is added to the loan balance.
The mortgage uses up all or most of the equity in your home; that leaves fewer assets for you and your heirs.
You are still responsible for property taxes, insurance, utilities, fuel, maintenance, homeowners’ insurance and other expenses.
Interest is not deductible on income tax returns until the loan is paid off.
Interest is charged on the outstanding balance and added each month to the amount you owe. This is another reason your total debt increases over time as loan funds are advanced to you. Monthly service fees and insurance are also added each month.
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.
Reverse mortgage tips
- Be cautious! Beware of anyone who tries to sell you something, like an annuity or home improvements, or tries to get you to pay off unsecured debt and suggests that a reverse mortgage would be an easy way to pay for it.
- Make sure you take time to understand the loan terms and costs. If you don’t fully understand what they’re selling, or you’re not sure you need what they’re selling, be even more skeptical.
- You will be required to have homeowner counseling before you sign a loan. Please make sure the counselor reviews your Good Faith Estimate and other loan documents.
- You should shop around for the best rate before you sign a reverse mortgage.
- You have a three-day cooling-off period if you sign a reverse mortgage. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing.
- Be aware that if you have to move to an assisted living facility on a permanent basis, you may be required to pay the reverse mortgage.
The Department of Housing and Urban Development (www.HUD.gov) has a lot of information about reverse mortgages, including the top 10 issues to be considered. Additional information, including a downloadable Consumer Guide, is available from the Consumer Financial Protection Bureau.
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