Basic Facts About A Reverse Mortgage

A reverse mortgage is a type of home loan that is only offered to seniors, 62 and older.  When you have this type of loan, instead of making a monthly payment to a lender as in a traditional loan, the lenders will make payments to you, the homeowner.  However, before judging to quickly as to how great this sounds, it is best to get the facts about a reverse mortgage before you hand over your equity to a bank.

Reverse Mortgage-Defined

A reverse home mortgage loan allows you to release a portion of the equity in your house into cash.  To the homeowner’s discretion, the cash can be disbursed in one lump sum, in multiple payments or as a line of credit.  While the reverse mortgage is active, the homeowner will make no payments on their home mortgage.  Again, this type of loan is only offered to seniors 62 and older.

Many may think that only a single family home can qualify for a reverse home mortgage. Surprisingly, you will find that is not the case. The following qualify for a reverse mortgage:

1) Single family homes
2) 2-4 unit properties
3) Manufactured homes (built after June 1976)
4) Condominiums
5) Townhouses
6) Cooperative housing is ineligible.

Costs of a Reverse Home Mortgage

The costs to get a reverse mortgage are similar to that of refinancing a home, except for the service fee set-aside. Some of the included costs are:

1) Origination Fee
2) Mortgage Insurance Premium
3) Appraisal Fee - range from $300 to $400
4) Closing costs
5) Service Fee Set-Aside -amount of money deducted to cover projected costs of servicing your account.

1) It allows the homeowner to stay in his or her home.
2) The money from the reverse mortgage can be used for anything, whether it is to buy a new car, cover daily living expenses, supplement your retirement, pay expenses for health care, pay off existing debits, and/or to prevent foreclosure.
3) You pay no monthly payments on a reverse mortgage while it is outstanding.
4) Social Security and Medicare is not affected
5) Retain Title of your Home

However, you must strongly consider the disadvantages that a reverse mortgage can bring to you and your heirs.

1) A reverse mortgage does not pay off your mortgage. In fact, you are accumulating debt on top of your mortgage. (Interest accrues on the amount that has actually been collected by the borrower.)
2) The reverse mortgage is the first lien on the house, and will have to be paid off first, before the actual mortgage is paid off.
3) You are still responsible for property taxes and hazard insurance.
4) If you do not live in the home for 12 months in a row, the loan could come due.
5) You will need to pay up-front costs, Interests and fees to activate the reverse mortgage.
6) The loan is based on current market appraisals (Which means you are probably not going to get what the house is worth, if you are in a recession.)
7) If you are planning to leave your house to your heirs, this will not be possible because the house will be sold to repay the reverse mortgage.
8) The amount of funds you are eligible to qualify for is dependent upon the youngest spouse (if it is a couple applying for the reverse mortgage), the appraised value, and interest rates.
9) Interest is not deductible on Income Taxes.
10) If married, both should sign the reverse mortgage. If the surviving spouse did not sign the reverse mortgage, the loan would come due.

Yes, this is a loan, and you or your estate will have to repay the debt.  There are several scenarios that can happen which will require you to begin paying off the loan:

1) If you have to convalesce in a nursing home or medical care center after a fall or surgery, what time span do you have before the loan comes due? You will need to get clarification as to what situations and/or circumstances define “not living in your home”, and thus, causing the loan to become due and payable
2) Upon your death, the home will be sold and the sale proceeds will be used to pay off the remaining debt. If the sale of the home exceeds the amount owed, the excess money would go to your estate.  Note: Most reverse mortgages have a “nonrecourse” clause. This prevents you or your estate from paying more than the value of the home. However, if you or your heirs want to retain ownership of the house, you will have to pay off the loan in full-even if the loan is greater than the value of the home.

There are circumstances where a reverse mortgage is a viable option. For instance, if your investable assets are exhausted, and you see a long-term cash flow problem, this may be an option to consider. If this is not the case, you should consider other alternatives. Such as:

1) Refinancing your mortgage and extending the term so that you can use some of the equity to pay off debt
2) Selling your house and use the remaining equity to pay your debts

To conclude, this type of mortgage seems so inviting when you hear the spokesperson on TV speaking positively about the advantages of a reverse mortgage. Take the time to do your research. Moreover, if you do not understand the reverse mortgage or its terms and possible ramifications, it would be wise to consult with an attorney or financial adviser.


Helpful Tips

1) Get the help of an attorney or financial adviser
2) Know the borrower’s obligation to the bank
3) Know the situations and/or circumstances that would cause you, the borrower to begin paying the reverse mortgage back.