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Reverse Mortgages

Reverse Mortgages are basically the opposite of the standard or “Forward” mortgages with which most people are familiar. In the typical Forward Mortgage, a bank will essentially purchase a house for you. In exchange for this, you agree to make a down payment and ongoing monthly payments, through which you reduce your debt and acquire an increasing amount of ownership or “equity” in the house over time. By the end of the loan term, you will own the entire house.

The point when you become eligible for a reverse mortgage is when you already own most (or all) of your home. A reverse mortgage is designed to be one way to convert your equity / ownership back into usable cash without having to sell or move out of your home. In this process, a bank will loan you money, using the value of your home as collateral. The amount of the loan will be determined by the value of your house and your age. If you are married, your spouse’s age is typically a factor as well.

The major difference between a reverse mortgage and a home equity loan is that the borrower / homeowner does not have to make any monthly re-payments with a reverse mortgage. Not only do you have use of the loan amount, you also eliminate any monthly mortgage payments (assuming your house was not already paid off). In fact, the lender does not expect to be repaid until a particular event occurs – such as a sale of the house or the death of the owner. However, because of this, the loan balance will accrue interest charges and actually increase the amount of your debt over time, decreasing your equity. Hence the name – Reverse Mortgage.

Important Facts to Know About Reverse Mortgages:

1. Presently, you must be at least 62-years-old to qualify for a reverse mortgage. If you are not at least 62, a reverse mortgage is not a viable financial option for you. If you need to tap into your home equity, your options are limited to a home equity loan with monthly payments or the sale of your house.

2. The total debt and interest accrued in a reverse mortgage can never exceed the value of your house. This feature is called a “Nonrecourse” clause. It is essential to make sure that any loan agreement you sign includes this clause.

3. With a reverse mortgage, you are still responsible for paying all property taxes and insurance premiums in a timely fashion and keeping the property free from liens. Failure to pay property taxes or insurance premiums can result in a default of your loan and allow the bank to take possession of the house. It is important to consider these costs in your budget.

4. Reverse mortgage lenders generally require you to maintain and preserve your property value. This means you must properly maintain the condition of your home. It is important to consider all repair and maintenance costs in your budgeting and financial calculations.

5. Most reverse mortgage lenders require that they are the “primary” lender. This means that there usually cannot be any other loans or liens on the property. As such, you must use the proceeds from the reverse mortgage to pay off all of these loans before you can use the remaining balance for anything else. This should be considered in your financial decisions. As always, we recommend consulting a professional financial advisor before entering into any agreements.

6. Most reverse mortgages require that the property be the borrower’s primary residence. If you choose to, or need to, move out for any reason (typically for longer than one year), you may trigger a default in the loan and/or be required to sell the property. Please be aware of any of these conditions before signing any agreement. If you may have to relocate for work, are considering moving closer to family or friends, or may be forced to move into a care facility because of declining health conditions, a reverse mortgage may not be the best option for you.

7. All owners of the home must apply for the reverse mortgage and sign all of the related loan papers. If you own the home jointly with another person or group, please take this into consideration.

8. Because of closing costs and the expenses related to initiating these types of loans, reverse mortgages are more expensive in the first few years. They become less costly over time as these initial costs are averaged over several years. Therefore, if you are planning to move out or sell your house in the near future, a reverse mortgage is probably not your best financial option.

9. You have 3 business days after closing a reverse mortgage to reconsider your decision and cancel the loan. Please note that “business days” include Saturdays, but not Sundays or legal holidays. You must make any cancellation in writing.

10. Reverse mortgages may have tax consequences. Consult a professional tax advisor before entering into any agreements.

11. Before you get a reverse mortgage, you will be required to receive counseling. This is a safeguard of the reverse mortgage process. To find a local counselor, you may contact any of the following:

a. AARP – (800) 424-3410

b. Fannie Mae’s Homepath service – (800) 732-6643

c. HUD’s Housing Counseling Clearinghouse – (888) 466-3487

How Are Reverse Mortgage Proceeds Distributed?

Most lenders will offer three choices for how a borrower can receive the proceeds of a reverse mortgage. In addition, most lenders will allow you to combine any of these options to meet your needs. The options are:

1. A lump sum payment

2. Fixed monthly payments

3. A line of credit to be used as needed

When you are making a choice about how to receive these proceeds, you should take a few factors into consideration:

1. You should only have to pay interest on the amounts you have borrowed. As such, it is generally best to only borrow what you need. Using a line of credit on an “as needed” basis will tend to keep your interest charges as low as possible.

2. If you are receiving Medicaid benefits, keeping certain balances in your accounts past the end of the month may disqualify you from coverage. Since the IRS does not usually consider loan advances to be income, by only borrowing the money to cover basic expenses each month, you are most likely to protect your Medicaid coverage and other entitlements.

3. The amount you are able to borrow has a maximum limit. It is important to budget carefully and use these proceeds wisely so that you do not use up this resource.

As with all important financial decisions, we recommend consulting a professional financial advisor prior to taking any major action.

Things To Look For (And Watch Out For) In A Reverse Mortgage:

1. Interest Rates and Loan Costs: As with any loan, the key factors to getting the best value is making sure you get the best combination of low interest rates and low closing costs and/or loan costs (points, fees, appraisal costs, insurance costs, etc.). It is also important to note whether you are signing up for a fixed or variable interest rate loan. Lenders are legally required to provide all of these rates and costs.

2. Financing the Loan Costs: Many banks will allow you to use the proceeds from your loan to pay for the various fees and closing costs associated with setting up the loan. If you are interested in keeping your out-of-pocket costs low, you should make sure this option is available before signing any loan agreements.

3. “Shared Equity”, “Shared Appreciation”, or “Contingent Interest”: While this is no longer a common practice, if your loan includes any of these items, BEWARE! In essence, these terms can entitle the lender to a share of any property value increases after the close of the loan – in addition to any interest and loan charges. For example, if the value of your house increased by $100,000 over the course of your loan and your lender has a 50% shared equity clause, the lender is entitled to $50,000 of this increase in addition to the principle and interest you already owe. These loans may allow you to receive a higher benefit up front, but this can make the overall loan costs very high and substantially reduce the amount left over for you or your heirs at the end of the loan.

4. Loan Increases with Property Value Increases: As opposed to a shared equity clause (above), it may be an advantage if you can increase your loan amount as the value of your house increases over time. You may want to consider this option when weighing one lender’s programs verses another’s.

5. Quality of the Lender: If your loan is not insured by the Federal Housing Administration (FHA) guarantees, it is important to take the financial stability of your lender into account. Particularly if you have a credit line or receive monthly payments, you want to make sure the lender will be able to meet their obligations for the term of the loan. In addition, it is important to find a lender that is responsive and offers good customer service. Working with a helpful, friendly, knowledgeable lender can keep your stress to a minimum.

Advantages of a Reverse Mortgage: