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If you are age 62 or
older and are "house-rich, cash-poor," a reverse mortgage (RM) 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 an RM. 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.
This brochure explains how RMs work. It describes similarities and
differences among the three RM plans available today: FHA-insured;
lender-insured; and uninsured. It also discusses the benefits and
drawbacks of each plan. Each plan differs slightly, so be careful to
choose the plan that best meets your financial needs. Organizations and
government agencies that offer additional information about RMs are listed
at the end of this brochure.
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. RMs works 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 RMs do not require any
repayment of principal, interest, or servicing fees for as long as you
live in your home. Funds obtained from an RM may be used for any purpose,
including meeting housing expenses such as taxes, insurance, fuel, and
maintenance costs.
Requirements and Responsibilities of the Borrower
To qualify for an RM, you must own your home. The RM 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 RM 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 an RM, you also remain
responsible for taxes, repairs, and maintenance. Depending on the plan you
select, your RM 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 (if the heirs are eligible) or by using the
proceeds from the sale of your home.
Common Features of Reverse Mortgages
Listed below are some points to consider about RMs.
* RMs 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 remember these costs will be added to your loan amount.
* RMs 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.
* RM loan advances are nontaxable. Further, they do not affect your Social
Security or Medicare benefits. If you receive Supplemental Security
Income, RM 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 RMs is not deductible for income tax purposes until you pay
off all or part of your total RM debt.
How Reverse Mortgages Differ
This section describes how the three types of RMs -- 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. This section also discusses advantages and drawbacks of
each loan type.
* FHA-insured. This plan offers several RM 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 RM 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 RM 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 RMs may provide
smaller loan advances than lender-insured plans. Also, FHA loan costs may
be greater than uninsured plans.
* Lender-insured. These RMs 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 RMs 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 RM is dramatically different from FHA
and lender-insured RMs. 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 RM, 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 RM 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 RMs 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.
Produced in cooperation with the American
Association of Retired Persons
and the National Center or Home Equity Conversion
Source ftc.gov |