The Truth About Reverse Mortgages
As an older American you can turn to “reverse” mortgages to seek money to pay off your current mortgage, finance a major home improvement, supplement your retirement income, or to pay for those unexpected health care expenses. These type loans can allow you to convert part of the equity in your homes into cash – without having to sell your homes, move out OR take on any additional monthly debt.
In a “regular” mortgage, you make monthly payments to the lender. However, with a “reverse” mortgage, you, the homeowner, receive money FROM the lender and, generally, you don’t have to pay it back for as long as you live in your home. Instead, the loan is repaid when you die, you sell your home or you no longer live in it as your principal residence. Reverse mortgages are ideal for homeowners who have high value in their homes but are lacking in available cash, or income! It allows you to stay in your home and still meet your financial obligations! In many cases, these type mortgages can increase the quality of your live from the extra income you otherwise wouldn’t have had!
To qualify, for most reverse mortgages, you must be at least 62 and live in your home. The proceeds of the reverse mortgage are typically tax-free, but check with your accountant, or CPA, to be safe. In addition, the typical reverse mortgage has no income restrictions whatsoever .
The Three Basic Types of Reverse Mortgages are:
– Single – purpose reverse mortgages which are offered by some state and local government agencies and certain nonprofit organization’s
– Federally – insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD) .
– Proprietary reverse mortgages, which are private loans that are backed by the companies that have developed them.
Single purpose reverse mortgages usually have very low costs. But they have limited availability and can only be used for a single purpose – which is specified by the government or nonprofit lender making the loan. An example would be to pay for home repairs, home improvements or for property taxes. To qualify for these loans you have to currently be in the low to moderate income brackets – in most cases.
HECMs, and proprietary reverse mortgages, tend to be more costly than other type home loans. The upfront costs can, sometimes, be very steep. They are generally most expensive if you only stay in your home for a short period of time – say less than 3 years. They are, however, widely available and have no income or medical requirements. They also can be used for any purpose you desire.
You must meet with a counselor from an independent, government approved housing counseling agency, before you can apply for an HECM . The counselor is required to explain the loan’s costs, financial implications, and all of the alternatives. As an example, counselors or supposed to tell you about other government, or nonprofit programs, for which you may qualify. The Counselors must also inform you of any single-purpose, or proprietary reverse mortgages, that are available within your geographic area. The amount of money you can borrow with a HECM, or proprietary reverse mortgage, depends on several factors. These are:
– Your age
– The type of reverse mortgage you select
– The current appraised value of your home
– The current interest rates
– Where your home is located.
– The older you are and
– The more valuable your home is and
– The less you owe on it
– The more money you can actually get.
The HECM mortgage gives you choices in how the loan proceeds are paid to you. These are:
1) The option to select a fixed monthly cash advance for a specific period or for as long as you live in your home.
2) The option of a line of credit allowing you to draw on the loan proceeds at any time in amounts that you have chosen.
3) The option to get a combination of monthly payments PLUS a line of credit.
4) HECM’s generally provide larger loan advances, at lower total costs, than proprietary reverse mortgage loans.
However, owners of higher – valued homes can probably get larger loan advances from a proprietary reverse mortgage. This is only true if you have a higher appraised value and a smaller mortgage balance. If that is the case, you may likely qualify for greater funds with a proprietary reverse mortgage.
NOTE The location, of your neighborhood, is only one part of the determination of appraised value.
Reverse mortgage loan advances are not taxable and, generally, will not affect your Social Security or Medicare benefits. You still retain the title to your home and you do not have to make any monthly payments. The loan must be repaid when the last surviving borrower has died, or sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable. This keeps you from losing your home if you have to have extended medical care for several months at a time!
If you are interested in a federally-insured HECM, understand that ALL HECM lenders must follow HUD rules and guidelines . Many of the loan costs, including the interest rate, will be the same no matter which lender you select. Some of these costs are:
– The origination fee
– Closing costs and
– Servicing fees will vary among lenders.
If you live in a higher – valued home you probably will be able to borrow more from a proprietary reverse mortgage than from an HECM . Although it also, generally, costs more to borrow the money! The best way to see key differences between a HECM and a proprietary loan is with a detailed side-by-side comparison of the future costs and there benefits. Most HECM counselors, and lenders, can easily provide you with this very important information.
No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan become due and payable. Ask your counselor, or your lender, to explain the Total Annual Loan Cost (TALC) rates. These show you the projected annual average cost of a reverse mortgage which also includes all the itemized costs.