What Is It?
With a reverse mortgage or RM, homeowners can borrow money against their equity, but it doesn't have to be repaid as long as they remain in the home. If they move, the lender is repaid from the proceeds of the sale of the home. If they die, the home will be sold, the lender repaid and any money left over will become part of the homeowner's estate.
How Do I Qualify?
To qualify for a reverse mortgage, you and any co-borrower must generally be at least 62 years old, with a structurally sound home that's either paid off or carrying a very small loan balance. The amount you can borrow will depend largely on the market value of your home, the interest rate charged and your age at the time of the loan. The size of your income is usually not a factor.
Loan proceeds are most often paid to the homeowner as regular monthly advances, though some plans may offer lump sum payments or a line of credit. You can use the loan proceeds any way you wish: to supplement your income, pay off medical bills, or even for vacations or travel.
Do I Retain Title to My Home?
Yes, as well as full responsibility for home maintenance and the payment of property taxes and insurance costs. Though the loan balance grows over time as interest is added, you never owe more than the loan amount or the value of your home when the loan is repaid, whichever is less. You can't be forced to sell the home to pay off the mortgage, even if the loan balance grows large enough to exceed the market value of your home. (An exception would be a reverse mortgage with a pre-determined term.) However, your equity in your home declines as the balance of the loan grows over time.
Are There Different Types of Reverse Mortgages?
Yes. Reverse mortgages generally fall into one of three classifications: FHA or government insured, lender insured and uninsured.
° An FHA-insured RM protects the homeowner by guaranteeing that loan advances will continue to be paid to the homeowner if the lender defaults. Interest rates may be adjustable, though any adjustments will effect how fast the loan balance grows, while the monthly payment made to the homeowner stays the same.
·° A lender-insured plan may mean larger loan advances, but often involves higher costs, including mortgage insurance premiums. Some lender-insured plans include an annuity that makes monthly payments to borrowers even if they sell their home and move. Like any annuity, the financial strength of the company involved is important, so check it before relying on such a plan.
° Uninsured plans involve monthly payments for a fixed term. And the end of the term, the full balance of the loan must be repaid. The risk here is not having the funds to repay the a loan when it comes due. This type of loan may be useful for short-term needs, but you might first want to check alternate ways of obtaining funds, such as a traditional home equity loan.
What are the Advantages of a Reverse Mortgage?
If you have low or even no monthly income, you can still get a reverse mortgage, while continuing to live in your home. The loan money is tax-free. And unlike traditional home equity loans, the loan doesn't have to be repaid during your lifetime unless you sell your house or decide to move.
The Disadvantages?
The balance of a reverse mortgage increases over time, so if you decide to move and must repay the loan, you may find yourself with little or no equity left in your home. Reverse mortgages also tend to be more costly than other loan instruments in terms of fees, insurance premiums and servicing charges, though usually these costs can be rolled into the loan. The interest on a reverse mortgage isn't tax-deductible until you pay off all or part of your loan, and the income generated may change your eligibility for specific "need-based" benefits such as Medicaid or Supplemental Social Security Income. If you receive these benefits, check how an RM will effect them before obtaining the loan.
With a fixed-term RM, you must have the money available to pay off the loan when the term ends, or you may could be forced to sell your home, use the proceeds to pay off the loan, and be left with no home and little or no cash .
Some Words of Caution
Reverse mortgages tend to be more complex than traditional mortgages, so make sure you understand all the terms and conditions involved. It's probably a good idea to check with your attorney or financial advisor before finalizing an RM, or you may want to meet with a government-recommended RM counselor. Also, beware of anyone who offers to find you an RM lender for a fee, since such information is available for free. (To find a counselor or lender, see below.)
Where Can I Get More Information?
Information on reverse mortgages can be found at the Fannie Mae (Federal National Mortgage Corp.) website at www.fanniemae.com. (Click on the "search" button and enter "reverse mortgage".) Or you can call Fannie Mae at 1-800-732-6643 to obtain a free package of information that includes a list of participating lenders.
The U. S. Department of Housing and Urban Development (HUD) also has a wealth of information on their website at www.hud.gov/groups/seniors.cfm, including a comprehensive, downloadable booklet. At HUD's toll-free number, 1-888-466-3487, you can also get a referral for a HUD-approved reverse mortgage counselor in your area.
Www.reversemortgage.org is the website of the National Reverse Mortgage Lenders Association, a non-profit trade association of financial companies that make reverse mortgages. It provides general information, a state-by-state list of RM lenders and a calculator to help you estimate how large an RM you can qualify for.
A good source for comparing different types of RMs is www.reverse.org, the website of the National Center for Home Equity Conversion, a non-profit organization that provides consumers with information on reverse mortgages.
AARP provides a comprehensive overview of reverse mortgages at http://www.aarp.org/revmort, including a calculator and a downloadable booklet.
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