The Ins and Outs of Reverse Mortgages
If you or a loved one own a home but are strapped for cash, i.e., house-rich but cash-poor, a reverse mortgage may be just what the doctor ordered. Until fairly recently, there were only two ways to get cash from your home - you could sell your home and move, or you could borrow against your home and make monthly loan repayments. Now there is a third alternative called a reverse mortgage, and it is another way to draw cash from your home - without selling it or making regular loan repayments. A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live in your home. A reverse mortgage loan will pay you in monthly advances or through a line of credit. Reverse mortgages convert your home equity into cash. But because you are drawing on the value of your home, there will be less equity for you and your heirs in the future. How it Works The reverse mortgage is appropriately named because the payment stream is "reversed." Instead of the borrower making monthly payments to a lender, as with a regular first mortgage or home equity loan, a lender makes payments to the borrower. In a regular mortgage, you use debt to turn your income into equity. In a reverse mortgage, you use debt to turn your equity into income. You are reversing the arrangement you used to buy your home. Then, you had income and wanted equity. Now, you have equity and want income. In both cases, you use debt to turn what you have into what you want. While a reverse mortgage loan is in force, the borrower owns the home and holds title to it, but does not have any monthly mortgage payments to make. The reverse mortgage funds may be paid to you in a lump sum, in monthly advances, through a line of credit or in a combination of the three, depending on the type of reverse mortgage and the lender. The most popular option - chosen by more than 60 percent of borrowers - is the line of credit, which allows you to draw on the loan proceeds at any time. The amount you are eligible to borrow generally is based on your age, the equity in your home and the interest rate the lender is charging. The money you get from a reverse mortgage is tax-free; it is not income that you must pay taxes on. Eligibility To qualify for a reverse mortgage, you must own your home and occupy the home as a principal residence where you live the majority of the year. Single-family one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept two- to four-unit owner-occupied dwellings and some condominiums and manufactured homes. Cooperatives are ineligible. For most reverse mortgages, the borrower must be at least 62 years of age. With a reverse mortgage, you don't have to make monthly repayments, so your income generally has nothing to do with getting the loan or the amount of the loan. There are no medical requirements to qualify. You may even be eligible for a reverse mortgage if you still owe money on your first mortgage. Many seniors get a reverse mortgage so they can pay off their first mortgage and stop making monthly payments. Terms and Conditions The size of the reverse mortgage you can get depends on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates and where you live. In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. Conversely, the least cash generally goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high. The costs associated with getting a reverse mortgage include the origination fee (which can usually be financed as part of the mortgage), an appraisal fee, interest charges and closing costs (title search and insurance, surveys, inspections, recording fees, mortgage taxes). In addition, there may be monthly servicing fees, equity-sharing fees, shared-appreciation fees, maturity fees and other charges similar to those for regular mortgages. These are legitimate fees and can be assessed solely at the discretion of the lender. Your debt or loan balance grows larger as you get cash advances, make no repayment and interest is added to your loan balance. A reverse mortgage is a rising-debt, falling-equity loan. As your debt grows larger, your equity in your home - i.e., your home's value minus what you owe - gets smaller. A reverse mortgage loan is a non-recourse loan, which means that no matter how high the loan balance grows, the borrower or his/her heirs never owe more than the home's market value. There are no monthly payments on a reverse mortgage, but the lender does eventually get repaid. Repayment is due when the last surviving borrower dies, sells the home or permanently moves away. "Permanently" ordinarily means you have not lived in your home for 12 consecutive months. You may also have to repay the lender if you fail to pay your property taxes, fail to keep up your homeowner's insurance or neglect your property so that its value declines sharply. When you sell your home or no longer use it for your primary residence, you or your estate must repay the cash you received from the reverse mortgage, plus interest and other finance charges, to the lender. All proceeds beyond what you owe belong to you or your estate. This means the remaining equity in your home can be passed on to your heirs. None of your other assets will be affected by a reverse mortgage loan. No debt will ever be passed along to the estate or heirs. You retain ownership of your home, and may sell or move at any time. Types of Reverse Mortgages Home Equity Conversion, the only reverse-mortgage program insured by the Federal Housing Administration. . Guaranteed by the FHA/Housing and Urban Development. . Flexible income payment option - funds may be paid to you in a lump sum, in monthly advances, through a line of credit, or in any combination, depending on the type of reverse mortgage and the lender. . Growing line of credit - if the value of your property increases, so does your credit line. . Maximum lending limit - $261,609. Home Keeper Mortgage, the reverse-mortgage program developed and backed by Fannie Mae. . Guaranteed by Fannie Mae. . Line of credit options. . Maximum lending limit - $300,700. Private-lender reverse mortgage
Flexible income payment options.
Growing line of credit.
Higher equity release options.
No maximum lending limit. Applying for a Reverse Mortgage The federal government requires that you first meet with an independent, federally approved reverse-mortgage counselor before applying for a reverse mortgage. The counselor's job is to educate you about reverse mortgages, to inform you about alternatives available to you given your situation, and to assist you in determining which particular reverse-mortgage product would best fit your needs if you ultimately elect to get a reverse mortgage. This counseling session is at no cost to the borrower and can be done in person or over the telephone. Shopping around for a reverse mortgage will help you to get the best financing deal. A reverse mortgage is a product, just like a car, so the price and terms may be negotiable. You'll want to compare all the costs involved in obtaining a reverse mortgage. Different lenders may quote you different prices, so you should contact several lenders to make sure you're getting the best price. "Because of all the variables in the cost of a reverse mortgage, it might be a good idea to meet with a financial planner (along with your children) to evaluate exactly how a reverse mortgage will affect your estate and future tax liabilities," says Dennis M. Filangeri, a certified financial planner practitioner in San Diego. Dos and Don'ts Determine if you really need a reverse mortgage or if another type of loan would be better for you. "Depending upon your needs and your financial situation," Filangeri says, "you may be able to meet your goals with another, less costly financial solution than that provided by a reverse mortgage." See a HUD-approved reverse-mortgage counselor - free of charge - to help you decide if a reverse mortgage is for you, or to help you choose among the different types of reverse mortgages. Don't apply for a reverse mortgage if you want to leave your home free and clear to your children or heirs, or if you have other less costly means to reach your financial goal. A reverse mortgage can be an expensive way to borrow money. Reverse-mortgage options can be confusing and numerous. Don't sign anything you don't understand and keep in mind that reverse mortgages are more costly to set up than other types of loans. Although the proceeds are tax-free, a reverse mortgage may affect your eligibility for certain need-based public benefits, such as Medicaid and Supplemental Security Income. And, as always, read everything before you sign it; never sign a loan application with blank spaces, and if it sounds too good to be true, it probably is! Milton Zall is president of Zall Enterprises, an editorial consulting firm based in Silver Spring, Md. He writes on taxes, investments, technology, the Internet and HR/business issues. He has an MBA in economics and is both a certified internal auditor and a registered investment advisor. He can be reached via email at firstname.lastname@example.org.