Reverse Mortgages

A reverse mortgage is a special type of loan available to older Americans to convert the equity in their homes into cash. The money from a reverse mortgage can provide seniors with the financial security they need to fully enjoy their retirement years. With a reverse mortgage, the equity built up over years of home mortgage payments can be paid to you. Unlike a traditional home equity loan or second mortgage, however, repayment is not required until you sell your home, move out permanently, or die. In a reverse mortgage the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application. The lender pays you the money either in a lump sum, in monthly installments, as a line of credit, or in a combination of these methods.

Are You Eligible for a Reverse Mortgage?

Reverse MortgagesTo be eligible for a reverse mortgage, you must be a homeowner, 62 or older, own outright or have a low mortgage balance that can be paid off at the time of closing and live in 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 above 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. You retain the title to your home with a reverse mortgage. You also remain responsible for taxes, repairs and maintenance. The lender does not take the 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 (a traditional mortgage) or by using the proceeds from the sale of your home. Your heirs will keep all of the money in excess of the amount owed on the loan.

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With a reverse mortgage, you remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs.

When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don't want your house; they want repayment.

Financing Fees

You can use the money you get from a reverse mortgage to pay the various fees that are charged on the loan. This is called "financing" the loan costs. The costs are added to your loan balance, and you pay them back plus interest when the loan is over.

Loan Amounts

The amount of money you can get depends most on the specific reverse mortgage plan or program you select. It also depends on the kind of cash advances you choose. Some reverse mortgages cost a lot more than others, and this reduces the amount of cash you can get from them.

Within each loan program, the amounts you can get generally depend on your age and your home's value:

  • The older you are, the more cash you can get; and
  • The more your home is worth, the more cash you can get.

The specific dollar amount available to you may also depend on interest rates and closing costs on home loans in your area.

Debt Payoff

Reverse mortgages generally must be "first" mortgages, that is, they must be the primary debt against your home. So if you now owe any money on your property, you generally must either :

  • pay off the old debt before you get a reverse mortgage; or
  • pay off the old debt with the money you get from a reverse mortgage.

Most reverse mortgage borrowers pay off any home debt with a lump sum advance from their reverse mortgage. You may not have to pay off other debt against your home if the prior lender agrees to be repaid after the reverse mortgage is repaid. Generally only state or local government lending agencies are willing to consider "subordinating" their loans in this way.

Debt Limit

The debt you owe on a reverse mortgage equals all the loan advances you receive (including any you used to finance the loan or to pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.

But if your rising loan balance ever grows to equal the value of your home, then your total debt is limited by the value of your home. Put another way, you can never owe more than what your home is worth at the time the loan is repaid. The lender may not seek repayment from your income, your other assets, or from your heirs.

(The technical term for this cap on your debt is a "non-recourse limit." It means that the lender does not have legal recourse to anything other than your home's value when seeking repayment of the loan.)

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All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a "permanent move" means that neither you nor any other co-borrower has lived in your home for one continuous year.)

Reverse mortgage lenders can also require repayment at any time if you:

  • fail to pay your property taxes;
  • fail to maintain and repair your home; or
  • fail to keep your home insured.

The difference between a reverse mortgage and a home equity loan

To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly repayments. So you don’t need a minimal amount of income to qualify for a reverse mortgage — you could have no income at all and still be able to get a reverse mortgage. With most home loans you could lose your home if you don’t make monthly payments. But with a reverse mortgage, since there aren’t any monthly repayments to make, you can’t lose your home. Most reverse mortgages require no repayment for as long as you, or any co-owner, live in the home. An important feature of a reverse mortgage is that the lender cannot take your home away if you outlive the loan. You do not need to repay the loan as long as you or one of the borrowers continue to live in the house and keep the taxes and insurance current. You can never owe more than your home’s value. In other words, if there is no equity in your home after it is sold, none of you estate’s other assets will be affected by a reverse mortgage, and the debt will never be passed along to your estate or heirs.

Considerations when thinking about a reverse mortgage

Cost. The cost of obtaining a reverse mortgage can be very high. Costs include origination fees and closing costs. You may have to pay some of these costs in cash. Most lenders allow a portion of these costs to be financed as part of the loan balance. In addition, interest, insurance and service charges will be added to the monthly loan balance. Thus, the amount you owe the lender increases over time.

Inheritance. A reverse mortgage may not be right for you if you want to leave your home, free and clear, to your children or others who will inherit from you. Your relatives will not be able to inherit your home from you unless they pay off the loan after you have passed away.

Related Article: Retirement and Wills - from Money Central


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