If you are age 62 or older and have a lot of equity in your home but not a lot of cash, a reverse mortgage may be an option to help increase your income.
Knowing your rights and responsibilities as a borrower may help to minimize your financial risks and avoid any threat of foreclosure or loss of your home.
One of the rights you have if you are considering a Reverse Mortgage is to be "INDIVIDUALLY COUNSELED" by the lender as to your rights and whether a certain type of loan is the right one for you.
How Reverse Mortgages Work
A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you retain home ownership. Reverse Mortgages work much like traditional mortgages, only in reverse. Rather than making a payment to your lender each month, the lender pays you. Unlike conventional home equity loans, most Reverse Mortgages do not require any repayment of principal, interest, or servicing fees for as long as you live in your home. Funds obtained from an Reverse Mortgage may be used for any purpose.
Requirements and Responsibilities of the Borrower
To qualify for an Reverse Mortgage, you must own your home.
The 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 you take out. It may also depend on the lender. 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.
Because you retain title to your home with Reverse Mortgage, you also remain responsible for taxes, repairs, and maintenance. Depending on the plan you select, repayment becomes due with interest either when you permanently move, sell your home, die, or reach the end of the pre-selected loan term. The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is sometimes repaid by refinancing the loan into a forward mortgage (if the heirs are eligible) or by using the proceeds from the sale of your home.
There are three types of REVERSE MORTGAGE plans available:
* lender-insured; and
Each plan differs slightly, so be careful to choose the plan that best meets your financial needs.
Common Features of Reverse Mortgages
ALL Reverse Mortgages are rising-debt loans. This means that the interest is added to the principal loan balance each month, because it is not paid on a current basis. Therefore, the total amount of interest you owe increases significantly with time as the interest compounds.
ALL three types of Reverse Mortgages (FHA-insured, lender-insured, and uninsured) charge origination fees and closing costs. Insured plans also charge insurance premiums, and some impose mortgage servicing charges. Your lender may permit you to finance these costs so you will not have to pay for them in cash. But remember these costs will be added to your loan amount.
ALL Reverse Mortgages use up some or all of the equity in your home, leaving fewer assets for you and your heirs in the future.
ALL Reverse Mortgages provide that your legal obligation to pay back the loan is limited by the value of your home at the time the loan is repaid. This could include increases in the value (appreciation) of your home after your loan begins.
ALL Reverse Mortgage loan advances are nontaxable. Further, they do not affect your Social Security or Medicare benefits. If you receive Supplemental Security Income (SSI), payments to you from the Reverse Mortgage do not affect your benefits as long as you spend them within the month you receive them. This is also true in most states for Medicaid benefits also. When in doubt, check with a benefits specialist at your local area agency on aging or legal services office.
Unlike the usual home mortgage, interest on an Reverse Mortgage is not deductible for income tax purposes until you pay off all or part of your total loan.
You generally can request a loan advance at closing that is substantially larger than the rest of your payments.
Like other home mortgage or home equity loans, some plans provide for fixed rate interest; others have adjustable rates that may change over the loan term based upon market conditions.
How Reverse Mortgages Plans Differ
FHA-insured. This plan offers several payment options. You may receive monthly loan advances for a fixed term or for as long as you live in the home, a line of credit, or monthly loan advances plus a line of credit. This is not due as long as you live in your home. With the line of credit option, you may draw amounts as you need them over time. Closing costs, a mortgage insurance premium and sometimes a monthly servicing fee is required. Interest is charged at an adjustable rate on your loan balance; any interest rate changes do not affect the monthly payment, but rather how quickly the loan balance grows over time.
The FHA-insured Reverse Mortgage permits changes in payment options at little cost. This plan also protects you by guaranteeing that loan advances will continue to be made to you if a lender defaults. However, FHA-insured Reverse Mortgages may provide smaller loan advances than lender-insured plans. Also, FHA loan costs may be greater than uninsured plans.
Lender-insured. This type of plan offer monthly loan advances or monthly loan advances plus a line of credit for as long as you live in your home. Interest may be assessed at a fixed rate or an adjustable rate, and additional loan costs can include a mortgage insurance premium (which may be fixed or variable) and other loan fees.
Loan advances from a lender-insured plan may be larger than those provided by FHA insured plans. Lender-insured Reverse Mortgages also may allow you to mortgage less than the full value of your home, thus preserving home equity for later use by you or your heirs. However, these loans may involve greater loan costs than FHA-insured, or uninsured loans. Higher costs mean that your loan balance grows faster, leaving you with less equity over time.
Some lender-insured plans include an annuity that continues making monthly payments to you even if you sell your home and move. The security of these payments depends on the financial strength of the company providing them, so be sure to check the financial ratings of that company. Annuity payments may be taxable and affect your eligibility for Supplemental Security Income and Medicaid. These "reverse annuity mortgages" may also include additional charges based on increases in the value of your home during the term of your loan.
Uninsured. This type of reverse mortgage is dramatically different from FHA and lender-insured loans. An uninsured plan provides monthly loan advances for a fixed term only - a definite number of years that you select when you first take out the loan. Your loan balance becomes due and payable when the loan advances stop. Interest is usually set at a fixed interest rate and no mortgage insurance premium is required.
If you consider an uninsured Reverse Mortgage, carefully think about the amount of money you need monthly; how many years you may need the money; how you will repay the loan when it comes due; and how much remaining equity you will need after paying off the loan.
If you have short-term but substantial cash needs, the uninsured Reverse Mortgage can provide a greater monthly advance than the other plans. However, because you must pay back the loan by a specific date, it is important for you to have a source of repayment. If you are unable to repay the loan, you may have to sell your home and move.
Reverse Mortgage Safeguards
One of the best protections you have with Reverse Mortgages is the Federal Truth in Lending Act, which requires lenders to inform you about the plan's terms and costs. Be sure you understand them before signing. Among other information, lenders must disclose the Annual Percentage Rate (APR) and payment terms. On plans with adjustable rates, lenders must provide specific information about the variable rate feature. On plans with credit lines, lenders also must inform you of any charges to open and use the account, such as an appraisal, a credit report, or attorney's fees.
For More Information
If you are interested in obtaining a current list of lenders participating in the FHA insured program, sponsored by the Department of Housing and Urban Development (HUD), or additional information on reverse mortgages and other home equity conversion plans, write to:
AARP Home Equity Information Center
601 E Street, NW
Washington, DC 20049
For additional information, you also may also send a self addressed stamped envelope to:
National Center for Home Equity Conversion
7373 - 147 St. West, Suite 115
Apple Valley, MN 55124
If you have a question or complaint concerning reverse mortgages, you also may wish to contact the Federal Trade Commission.
Although the FTC cannot represent you directly in a dispute with a company, it can act when it sees a pattern of possible law violations.
Contact the Consumer Response Center by phone:
toll-free 1-877-FTC-HELP (382-4357);
by mail: Consumer Response Center, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580; or
by email: use the complaint form at www.ftc.gov.
This brochure is intended only to provide general information. If you have more complicated questions or need more specific advice, please consult a lawyer.