What is a Reverse Mortgage?

If you watch any TV at all then you have probably seen one or more commercials urging older homeowners to take out a reverse mortgage. To most [uninformed] people, a reverse mortgage is often mystifying and possibly even thought of as a scam. This article will hopefully provide you with the information needed to make an informed decision about reverse mortgages.

What is a Reverse Mortgage?

A reverse mortgage is a loan that homeowners 62 and over can take out against the equity in their house. The most significant parts about a reverse mortgage is that the money you get is usually not taxed and you do not have to pay it back until you (or the last living borrower) has died, sold the house, or the house is no longer your primary residence. A reverse mortgage allows you to receive the equity in your home in cash without selling it and without having a monthly payment. You keep the title to the house, and all of the benefits that come with it.

Three Types of Reverse Mortgages

There are three types of reverse mortgages that you could choose from. They all vary slightly, and some may not be available in your area.

Single Purpose Loans

• Like the name implies, single purpose loans can only be used for a single, “approved” purpose such as home remodeling, home repair, or home improvement.
• Single purpose loans are offered by non-profit organizations and some state and local government agencies.
• These loans often have low fees and overall costs.
• They may not be available in all areas.
• They may have a low-to-moderate income restriction.

Home Equity Conversion Mortgage (HECM)

• HECMs are federally insured and regulated by the Housing and Urban Development (HUD) as well as the US Department of Housing.
• HECMs usually have higher fees and overall costs, especially if you only live in your home for a short period of time.
• They are usually widely available.
• An HECM can be used for any purpose.
• Generally, there are no income restrictions with HECMs.
• All HECMs must follow the guidelines set forth by HUD. This means that for the most part the fees associated with them (including the interest rate) will be the same with all lenders. HUD does not, however, regulate fees like origination fees and closing costs.

Proprietary Loans

Proprietary loans are pretty much the same as HECMs except that they are not federally insured and they are not regulated by HUD. These lenders set their own regulations and fees.

Receiving Your Money

A reverse mortgage offers several ways for you to obtain your money:

• As a lump sum
• Regular monthly installments
• A line of credit that lets you decide when and how much money to receive
• Any combination of the above

Things to Keep in Mind

Before you run out and get a reverse mortgage there are a few more points that you should look at:

• Besides the typical interest and closing costs associated with most reverse mortgages, some lenders also charge origination fees, and “administration” or “service” charges throughout the life of the loan.
• Taking out a reverse mortgage essentially adds debt to your existing mortgage. Therefore, the amount of equity you have in your home decreases.
• In most cases, the proceeds from a reverse mortgage will not affect Medicare or Social Security benefits.
• Interest rates my be fixed or they may vary. Make sure that you know how the lender determines the interest rate that they charge you.
• Unlike a regular, or forward mortgage, the interest that you pay on your reverse mortgage is not tax deductible until the loan is paid in part or in full.
• Only get a reverse mortgage if it has a non-recourse clause. This states that you, or your estate, will never have to pay more than the total value of your home when the loan is due.