Is a Reverse Mortgage right for you?
A reverse mortgage is a special type of home loan. With a reverse mortgage, the borrower takes out a loan against her home, and that loan provides the borrower/homeowner with tax-free income.
The borrower can be paid in several ways: as one lump sum payment, a series of equal monthly payments, equal payments for a fixed period of months, or an amount determined by the borrower each month.
How Does a Reverse Mortgage
Differ From a Forward Mortgage?
A forward mortgage increases the borrower’s equity in the property. The purpose of a forward mortgage is eventual ownership of the property.
Before closing on a forward mortgage, the borrower has no equity in the home. At closing, the borrower owes her lender a lot of money and may have a small amount of equity in the property. By making monthly payments to the lender, the borrower pays down the debt and increases her stake in the property. With every monthly payment, the amount of the debt is reduced and the borrower comes one step closer to owning the property. Once the borrower has repaid the entire debt, she completely owns the property.
The purpose of a reverse mortgage is to generate income, not equity.
Before closing on a reverse mortgage, the borrower usually has substantial equity in the property. During the course of the loan, the borrower receives payments from the lender. These payments increase the amount of the loan and the amount the borrower has to repay. As the loan balance increases, the equity decreases.
During the course of the loan, the borrower continues to own and reside in the property. The borrower is still responsible for property taxes, insurance payments, and any repairs the home may need. If the borrower fails to keep up with these obligations the loan may become due and payable in full.
At the end of the loan, the borrower owes a substantial amount and has much less equity than when the loan began.
In order to be eligible for a reverse mortgage you must be:
- 62 or older;
- living in the home as a primary residence;
- not delinquent on any federal debt;
- the owner of a single family residence, or a 1-4 unit building with one unit occupied by the borrower, and
- the property meets the U.S. Department of Housing and Urban Development property standards.
Types of Reverse Mortgage Loans
A Home Equity Conversion Mortgage is insured by the federal government and can be used for any purpose. The loan is supported by the U.S. Department of Housing and Urban Development.
With this loan the initial fees can be quite high. Home Equity Conversion Mortgages may turn out to be better for you in the end. The high initial fees are offset by low interest rates during the loan.
A Deferred Payment Loan is a loan specifically given to help the homeowner pay for repairs or improvements to the property.
A Property Tax Deferral Loan is a public sector reverse mortgage. “Public sector” reverse mortgages are generally only available to low-income individuals. These loans are given in annual advances and can only be used to pay the taxes on the property.
When is Payment on a Reverse Mortgage Due?
Reverse mortgages usually do not require any repayment as long as the borrower lives in the mortgaged home. When the borrower no longer uses the home as a primary residence or dies, the entire amount of the loan comes due. The amount owed includes the amount borrowed and any interest or other charges that have accrued.
What are Some Advantages of Reverse Mortgages?
A reverse mortgage is tax-free income. The money that is provided by a reverse mortgage can help borrowers remain in their homes during the last years of their lives. The money from a reverse mortgage can also help pay for necessities that the borrower would otherwise be unable to afford.
A reverse mortgage can help fund home repairs or improvements, or help family members during times of financial need.
What are Some of the Disadvantages
of Reverse Mortgages?
A reverse mortgage can reduce the homeowner’s equity in her property to zero. The homeowner and her heirs will not benefit when the home is sold. If the borrower loses all of her equity in the property, then her heirs cannot inherit it after her death.
Even if the value of the borrower’s home increases, the equity can continue to fall. The housing market is unstable, and there is no guarantee that the amount the borrower receives from the reverse mortgage will be less than the amount for which the home is sold.
Additionally, if the borrower receives public benefits such as SSI or Food Stamps, the loan payments can affect eligibility for those programs.
There are several pros and cons to taking out a reverse mortgage. Remember that the fees and extra charges can vary from loan to loan. It is important to find out exactly what these charges are before you take out a reverse mortgage. Y
ou should talk to a financial counselor before you accept a reverse mortgage loan. You should make sure you really need the money and can accept losing your home equity. If you have other options that are less costly, you might want to explore those first.
Most importantly, make sure you understand what a reverse mortgage is before you sign the loan documents.
For more information on reverse mortgages, you can visit these Web sites:
This article was written by Christal Coakley, Esq., staff attorney with the
Community Advocacy Program of The Legal Aid Society of Cleveland.
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