Feature Articles - Aging
Reverse mortgages
Brenda Procter, M.S., state specialist & instructor, Personal Financial Planning, College of Human Environmental Sciences, University of Missouri Extension
Many older Americans take out reverse mortgages to finance
home improvement, pay off a current mortgage, add to retirement
income or pay for health care expenses. Reverse mortgages allow
older homeowners to turn part of the equity in their homes into
cash without selling their homes or taking on additional monthly
bills. Reverse mortgages sound like a great solution for many
seniors, but costs can be quite high and there are some
disadvantages to consider.
In a regular mortgage, you make monthly payments to the
lender. But in a reverse mortgage, the lender pays you. You
don’t have to pay the money back as long as you live in your
home. Instead, the loan gets repaid when you die, sell your home
or no longer live there as your principal residence.
To qualify for most reverse mortgages, you must be at least 62 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.
Types of reverse mortgages
The three basic types of reverse mortgage are:
- Single-purpose reverse mortgages offered by some state and local government agencies and nonprofit organizations.
- Federally-insured reverse mortgages, which are known as home equity conversion mortgages (HECMs) and are backed by the U.S. Department of Housing and Urban Development (HUD).
- Proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.
Single-purpose reverse mortgages usually 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.
HECMs and proprietary reverse mortgages tend to be more costly
than other home loans. They are widely available, have no income
or medical requirements and can be used for any purpose.
Before applying for an HECM, you must meet with a counselor from
a government-approved housing counseling agency. The counselor
must explain the loan’s costs, financial implications and
alternatives.
The amount of money you can borrow with an HECM or proprietary
reverse mortgage depends on your age, the type of reverse
mortgage you select, the appraised value of your home, current
interest rates and where you live.
The HECM lets you choose 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. You can also take out a line
of credit or get a combination of monthly payments plus a line
of credit if you choose.
HECMs generally provide larger loan advances at a lower total
cost than proprietary loans.
Reverse mortgage loan advances are not taxable and generally do
not affect Social Security or Medicare benefits. You keep 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.
Considerations when shopping for a reverse mortgage
As you consider a reverse mortgage, keep in mind that:
- Lenders generally charge origination fees and other closing costs and also may charge servicing fees during the term of the mortgage.
- The amount you owe on a reverse mortgage grows over time. Interest is charged on the balance and added to the amount you owe each month.
- Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and change with market conditions.
- Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs.
- Because you retain the title to your home, you are still responsible for property taxes, insurance, utilities, fuel, maintenance and other expenses.
- Interest on reverse mortgages cannot be deducted on income tax returns until the loan is paid off in part or whole.
Getting a good deal
If you are considering a reverse mortgage, shop around to
compare options and the terms. Talk to at least three lenders if
possible. Learn as much as you can about reverse mortgages.
If you want to make a home repair or improvement or need help
paying your property taxes, find out if you qualify for any
low-cost single-purpose loans available in your area. Area
Agencies on Aging (AAAs) usually know about these programs. To
find the nearest agency, visit
the
Eldercare Locator Web site or call toll-free,
1-800-677-1116.
If you are interested in a federally-insured HECM, know that all
HECM lenders must follow HUD rules and that many of the loan
costs, including the interest rate, will be the same no matter
which lender you select.
No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the total annual loan cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.
Be a savvy consumer
Be particularly cautious if someone tries to sell you
something, like an annuity, and suggests that a reverse mortgage
would be an easy way to pay for it. If you don’t fully
understand what they’re selling, or you’re not sure you need it,
be even more skeptical.
No matter why you decide to take out a reverse mortgage, you have at least three business days after signing the loan documents to cancel it for any reason without penalty. You must cancel in writing and the lender must return any money you have paid so far for the financing.
Reporting possible fraud
If you suspect that anyone is violating the law, let the
counselor, lender or loan servicer know. Then, file a complaint
with the Missouri attorney general’s office at 1-800-392-8222,
the Missouri secretary of state’s office at 1-800-721-7996 and
the Federal Trade Commission (FTC) online at
http://ftc.gov/ or by
phone, toll-free, at 1-877-382-4357.
Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives. Contact the following organizations for more information:
Reverse Mortgage Education Project
AARP Foundation
601 E Street, NW
Washington, DC 20049
1-800-209-8085
http://www.aarp.org/money/personal/reverse_mortgages/
U.S. Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
1-888-466-3487
http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
1-877-FTC-HELP (1-877-382-4357)
http://ftc.gov/bcp/menus/consumer/credit.shtm — Click on
“Mortgages/Real Estate”
The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free information on consumer issues, visit http://ftc.gov/ or call toll-free, 1-877-382-4357; TTY: 1-866-653-4261. The FTC enters consumer complaints into a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
Adapted from Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity, June 2005, downloaded from http://ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm, December 9, 2008.
Last update: Tuesday, May 05, 2009
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