What is a Reverse Mortgage?
A reverse mortgage is a special type
of loan used by older Americans to convert the equity in their homes into
cash. The money from a reverse mortgage can provide seniors with the
financial security they need to fully enjoy their retirement years.
The reverse mortgage is aptly named because the payment stream is "reversed."
Instead of making monthly payments to a lender, as with a regular first
mortgage or home equity loan, a lender makes payments to you.
While a reverse mortgage loan is outstanding, you continue to own the home
and hold title to it.
The money from a reverse mortgage can be used for ANYTHING: daily living
expenses; home repairs and home modifications; medical bills and prescription
drugs; pay-off of existing debts; continuing education; travel; long-term
health care; prevention of foreclosure; and other needs.
If your home needs physical repairs (mandatory repairs) in order to qualify
for a reverse mortgage, a portion of the proceeds will be set aside for this
purpose.
Qualifications
To qualify for a reverse mortgage you must be at least 62 and own your own
home. There are no income or medical requirements to qualify. You may be
eligible for a reverse mortgage even if you still owe money on a first or
second mortgage. In fact, many seniors get a reverse mortgage to pay off a
first mortgage.
You can choose how to receive the money from a reverse mortgage. The options
are: all at once (lump sum); fixed monthly payments (for up to life); a line
of credit; or a combination of these. The most popular option - chosen by
more than 60 percent of borrowers - is the line of credit, which allows you
to draw on the loan proceeds at any time.
Loan Size
The size of the reverse mortgage that you can get depends on your age at the
time you apply for the loan, the type of reverse mortgage you choose, the
value of your home, current interest rates, and - sometimes - where you live.
In general, the older you are and the more valuable your home (and the less
you owe on your home), the larger the reverse mortgage can be.
Loan Cost
The costs associated with getting a reverse mortgage include the origination
fee (which can be financed as part of the mortgage), an appraisal fee, and
other charges similar to those for regular mortgages.
The money provided to you from a
reverse mortgage is tax-free, and does not affect regular Social Security or
Medicare benefits. However, the funds received from a reverse mortgage may
affect your eligibility for certain kinds of government assistance, such as
Medicaid or state assistance programs, so you should check into this before
getting a reverse mortgage. To do this you may wish to consult with your
local Area Agency on Aging (to locate, call 1-800-677-1116, or visit
www.eldercare.gov), a
reverse mortgage lender, or a tax attorney.
Before applying for a reverse mortgage, you must first meet with a reverse
mortgage counselor. You may, however, first approach a reverse mortgage
lender, who can provide you with the names of approved counseling agencies in
your area. A list of approved counseling agencies nationwide is posted on the
Web by the U.S. Department of Housing and Urban Development.
The counselor's job is to educate you about reverse mortgages, to inform you
of other alternative options available to you given your situation, and to
assist you in determining which particular reverse mortgage product best fits
your needs.
In general, counseling sessions are done face-to-face, although telephone
counseling is becoming more prevalent.
No payments are due on a reverse mortgage while it is outstanding. The loan
becomes due and payable when you cease to occupy your home as a principal
residence. This can occur if you (the last remaining spouse, in cases of
couples) pass away, sell the home, or permanently move out.
The home does not have to be sold to pay off the loan. You (or your heirs)
can pay off the reverse mortgage and keep the home. In any event, the amount
owed on the reverse mortgage can never exceed the value of the home at the
time the loan must be repaid. Moreover, if the home is sold and the sales
proceeds exceed the amount owed on the reverse mortgage, the excess money
goes to you or your estate.
Reverse mortgages are offered by banks, mortgage companies, and other
financial institutions.
Three reverse mortgage products are available to consumers in the U.S. at the
present time, and one product in Canada.
In the U.S., the most popular reverse mortgage is the federally-insured
reverse mortgage, called the FHA Home Equity Conversion Mortgage Program (HECM).
The other major product is the Home Keeper reverse mortgage, developed in the
mid-1990s by Fannie Mae, a private national mortgage company. One "jumbo"
private reverse mortgage product, designed to accommodate seniors living in
higher-priced homes, is offered by Financial Freedom Senior Funding Corp., of
Irvine, CA. This is the Cash Account Plan. The HECM and Home Keeper products
are available in every state, while Financial Freedom's product is offered in
21 states and the District of Columbia.
