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Reverse Mortgages
If you are age 62 or older and are house-rich, cash-poor,
a reverse mortgage may be an option to help increase your income.
However, because your home is such a valuable asset, you may want
to consult with your family, attorney or financial advisor before
applying for any reverse mortgage. 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. Reverse mortgages
are considered risky because at the end of it you don't own your
home anymore.
There are three reverse mortgage plans available today:
FHA-insured, lender-insured, and uninsured.
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 a reverse mortgage may be used
for any purpose, including meeting housing expenses such as taxes,
insurance, fuel and maintenance costs.
To qualify for a reverse mortgage, you must own your home. 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 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 a reverse mortgage,
you also remain responsible for taxes, repairs, and maintenance.
Depending on the plan you select, your reverse mortgage 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 usually repaid by refinancing
the loan into a forward mortgage or by using the proceeds from
the sale of your home.
What to consider about reverse mortgages:
• 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 plans (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, these costs
will be added to your loan amount.
• Reverse mortgages use up some or all of the equity in
your home, leaving fewer assets for you and your heirs in the
future.
• You generally can request a loan advance at closing
that is substantially larger than the rest of your payments.
• 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.
• Reverse mortgage loan advances are nontaxable. Further,
they do not affect your Social Security or Medicare benefits.
If you receive Supplemental Security Income, reverse mortgage
advances do not affect your benefits as long as you spend them
within the month you receive them. This is 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.
• Some plans provide for fixed rate interest. Others involve
adjustable rates that change over the loan term based upon market
conditions.
• Interest on reverse mortgages is not deductible for
income tax purposes until you pay off all or part of your total
reverse mortgage debt.
The three types of reverse mortgages, FHA-insured, lender-insured
and uninsured, vary according to their costs and terms. Although
the FHA and lender-insured plans appear similar, important differences
exist.
FHA-insured: This plan offers several reverse
mortgage 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
reverse mortgage 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: These reverse mortgages 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 reverse mortgage is dramatically
different from FHA and lender-insured reverse mortgages. 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.
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.
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 American Association of
Retired Persons 601 E Street, N.W. Washington, D.C. 20049
For additional information, you also may contact the:
National Center for Home Equity Conversion 7373 - 147 St. West,
Suite 115 Apple Valley, MN 55124
This organization requests that you send a self-addressed stamped
envelope.
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