Feature Articles - Aging
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. Reverse mortgages can help homeowners
stay in their homes and still meet their financial obligations.
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 can only 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. The upfront costs can be high, which is quite
expensive if you stay in your home for just a short time. 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.
For example, counselors must tell you about government or nonprofit
programs you may qualify for and any single-purpose or proprietary
reverse mortgages available in your area.
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. In general, the older you are, the more valuable
your home and the less money you owe on it, the more money you can
get from a reverse mortgage.
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, which lets you draw on the loan proceeds at any time in
amounts you choose. You can 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. Owners of higher-valued homes may get
bigger loan advances from a proprietary reverse mortgage.
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 may also charge servicing fees during the term of the mortgage. The lender generally sets these fees and costs.
- The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
- 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 all or some of the equity in your home, leaving fewer assets for you and your heirs. A nonrecourse clause in most reverse mortgages prevents you or your estate from owing more than the value of your home when the loan is repaid.
- Because you retain the title to your home, you are still responsible for property taxes, insurance, utilities, fuel, maintenance and other expenses. If you don’t pay property taxes or maintain homeowners insurance, you risk the loan becoming due and payable.
- 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 before you talk
to a counselor or lenders so you can ask more informed questions,
which could lead to a better deal.
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,
or call toll-free, 1-800-677-1116. Ask the AAA for information about
available loan programs for home repairs or improvements, property
tax deferral or property tax postponement programs.
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. There are still some costs — including the origination fee, other closing costs and servicing fees — that may vary among lenders.
If you live in a higher-valued home, you may be able to borrow more from a proprietary reverse mortgage — but it usually will cost more. The best way to see key differences between an HECM and a proprietary loan is with a detailed side-by-side comparison of future costs and benefits. Many HECM counselors and lenders can help you with this comparison.
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, you’re not sure you need it or you get a call from out of the blue, be even more skeptical.
Keep in mind that your total cost would be the cost of what they’re selling plus the cost of the reverse mortgage. If you think you need what they’re selling, shop around before you buy. Get three quotes if you can.
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. 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 877-FTC-HELP (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
601 E St., NW
Washington, DC 20049
U.S. Department of Housing and Urban Development (HUD)
451 7th St., SW
Washington, DC 20410
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
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 helps 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-FTC-HELP (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), http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm (accessed December 9, 2008).
Last update: Tuesday, October 11, 2011