Don't Consider Cashing in your Home's Equity Until You Read This!
As an older american you can turn to a "reverse" mortgages to seek money to pay off your current mortgage, finance a major home improvement, supplement your retirement income, or to pay for healthcare 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, the homeowner receives money FROM the lender and, generally, doesn't have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, you sell your home, or you no longer live there as your principal residence. Reverse mortgages are ideal for homeowners who are house - rich but cash - poor! It allows you to stay in your home and still meet your financial obligations! In many cases, these type of mortgages have been used to increase the quality of live of many older americans.
To qualify, for most reverse mortgages, the owner must be at least 62 and live in their home. The proceeds of the reverse mortgage are typically tax-free, but check with your accountant, or CPA, to be sure. In addition, the typical reverse mortgage has no income restrictions whatosver.
The Three Types of Reverse Mortgages:
The three basic types of reverse mortgage are:
- Single - purpose reverse mortgages which are offered by some state and local government agencies and certain nonprofit organizations.
- 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 only can be used for one purpose -which is specified by the government or nonprofit lender. An example would be to pay for home repairs, home improvements or for property taxes. To qualify for these loans you have to currently have low to moderate income - in most cases.
HECMs and proprietary reverse mortgages tend to be more costly than other type home loans. The up-front 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 2-5 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.
In theory:
- The older you are
- 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. This is similair to the normal home equity loan.
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.
Loan Features:
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 hoem if you have to have extended medical care for sevdral months at a time!
As you consider a reverse mortgage be aware that, as is the case with all mortgage loans, that:
- Lenders charge origination fees and other closing costs for a reverse mortgage. Some lenders may also charge servicing fees for the life of the mortgage. Generally the lender sets these fees and costs.
- The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the unpaid principal you owe each month. That means your total debt increases, as time goes by, and loan funds are advanced to you and the interest continues to accrue on your loan.
- Reverse mortgages will usually have fixed rates. Just be aware that some of these loans may have variable rates instead. Loans that have variable rates are mormally tied to some type of financial index and will change, up or down, according to the market conditions that they are indexed to.
- Reverse mortgages can use up some, or all, of the equity in your home. This will leave fewer assets for you and your heirs. A "non-recourse" clause, found in almost all reverse mortgages, prevents either you, or your estate, from owing more than the value of your home when the loan is finally paid off.
- Because you retain title to your home, you still remain responsible for the property taxes, insurance, utilities, fuel, maintenance, and all the other normal home owner expenses. So, for example, if you don't pay the property taxes, or maintain the insurance, you will run the risk of having the loan becoming due and payable as soon as the mortgage lender is notified of these circumstances.
- Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off either in part or in whole.
Getting a Good Deal
If you are considering a reverse mortgage please be a wise consumer and shop around to compare all of the available options and the various terms offered. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. It will help you to ask more informed questions which will lead you to a better deal.
If you are interested in a federally-insured HECM, understand that ALL HECM lenders must follow HUD rules and guidleines. 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 yopur 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.
Be a Savvy Consumer
Alwasy be cautious if anyone is trying to "sell you something", like an annuity, suggesting that a reverse mortgage will be an easy way to pay for the annuity. If you don't fully understand what they're selling, or you're not sure you need what they're selling, be even more skeptical.
Keep in mind that your total cost would be the cost of what they're selling plus the cost of the reverse mortgage. This amounts to a "doubling" of your costs thsu reducing the amount of money you would actually have to live on. So if you really think you need what they're selling - take your time and shop around before you buy.
No matter why you may decide to take out a reverse mortgage, you generally have at least three business days after signing the loan documents to cancel it for any reason without any penalties. Remember, that you must cancel in writing delivered ot the lender within the three day period and the lender must return any money you have paid as up front or closing fees.
