Many older Americans are seeking money to
finance a home improvement, pay off a current mortgage, supplement
their retirement income, or pay for healthcare expenses.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 conventional mortgage,
you make monthly payments to the lender. But in a “reverse” mortgage,
you receive money from the lender and generally don’t have to pay it
back for as long as you live in your home. Instead, the loan must be
repaid when you die, sell your home, or no longer live there as your
principal residence. Reverse mortgages can help homeowners who are
house-rich but cash-poor 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.
Three Types of Reverse Mortgages
Single-purpose reverse mortgages: are 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: They generally 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, for
example, 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: They tend to be more costly
than other home loans. The up-front costs can be high, so they are
generally most 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 a HECM,
you must meet with a counselor from an independent government-approved
housing counseling agency. The counselor must explain the loan’s costs,
financial implications, and alternatives. For example, counselors
should tell you about government or nonprofit programs for which you
may qualify, and any single-purpose or proprietary reverse mortgages
available in your area.
The amount of money you can
borrow with a HECM or proprietary reverse mortgage depends on several
factors, including 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 you owe on it, the more money you can get.
The HECM gives you choices
in 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.
Or you can opt for a line of credit, which allows you to draw on the
loan proceeds at any time in amounts that you choose. You also can get
a combination of monthly payments plus a line of credit.
HECMs generally provide
larger loan advances at a lower total cost compared with proprietary
loans. But owners of higher-valued homes may get bigger loan advances
from a proprietary reverse mortgage. That is, if you have a higher
appraised value without a large mortgage, then you may likely qualify
for greater funds. Location (for example, your neighborhood) is only
one part of the determination of appraised value.
Loan Features Reverse mortgage loan
advances are not taxable, and generally do not affect Social Security
or Medicare benefits. You retain 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.
As you consider a reverse mortgage, be aware that:
Lenders generally charge
origination fees and other closing costs for a reverse mortgage.
Lenders also may 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 generally 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 will likely change according to market conditions.
Reverse mortgages can use
up all or some of the equity in your home, leaving fewer assets for you
and your heirs. 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.
Because you retain title to
your home, you remain responsible for property taxes, insurance,
utilities, fuel, maintenance, and other expenses. So, for example, if
you don’t pay property taxes or maintain homeowner’s insurance, you
risk the loan becoming due and payable.
Interest on reverse mortgages is not deductible 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 your options and the offered
terms. Learn as much as you can about reverse mortgages before you talk
to a counselor or lender. It will help you 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, you may
want to find out if you qualify for any low-cost single-purpose loans
that may be available in your area. Area Agencies on Aging (AAAs)
generally know about these programs. To find the nearest agency, visit
www.eldercare.gov Ask the AAA for
information about available “loan programs for home repairs or
improvements,” or “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. Still, some costs
including the origination fee, other closing costs, and servicing fees
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 generally will cost more. The best way to see
key differences between a HECM and a proprietary loan is with a
detailed side-by-side comparison of future costs and benefits. Many
HECM counselors and lenders can provide you with this important
information.
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.
