Have you heard about reverse mortgages and wondered how they work?
Such loans are an alternative to selling your home or borrowing against your home if you need money. Reverse mortgages allow homeowners to convert their home equity into cash without having to move or assume extra debt.
In contrast with the mortgage meltdown that’s been dominating business headlines for months now, the reverse mortgage market has been cruising along briskly. These loans aren’t for everyone, though.
The following tips can help you understand the ins and outs of reverse mortgages, either for yourself or for an aging parent or relative who could use a financial boost.
1. Age matters. For most reverse mortgages, a borrower must be at least 62 and must live in the home as a principal residence. Generally, the older you are and the more valuable your home is, the more money you can tap.
2. Learn how the loans work. Most reverse mortgages require no repayment as long as you live in your home. The loan must be repaid in full, along with interest, when the last living borrower dies, sells the home or moves away.
3. Understand the lender’s role. A lender – typically a bank – will provide you with a loan in an amount ranging from 20 percent to 60 percent of your home’s equity. In exchange, the lender will receive a portion of your home’s value when you die or sell the home.
4. Choose a payment preference. The loan can be paid to you in three ways: as a lump sum, in regular monthly or quarterly installments, or as a line of credit you can tap as needed.
5. Know your responsibilities. Borrowers are responsible for property taxes, insurance and home repairs. Your loan could become due and payable in full if you fail to meet those responsibilities.
6. Get free help. Don’t sign a service agreement with anyone who promises to help you find a reverse mortgage lender or apply for a loan. Such help is available at little or no cost from the U.S. Department of Housing and Urban Development or a HUD-approved housing counseling agency. Call HUD’s toll-free Housing Counseling and Referral Line at 1-800-569-4287for details.
7. Assess your status. If you own your home outright or nearly so, a reverse mortgage can help you financially at a point in your life when you may really need it – or at a point when you may really want to take that trip around the world or pursue another lifelong dream. But if you still owe quite a bit of mortgage principal, you’ll usually have to pay that off first. (You can do that via a lump-sum advance on your reverse mortgage, which may or may not make financial sense for you depending on your circumstances.)
8. Assess neighborhood real estate prices. Over time, a reverse mortgage whittles away at the home equity you built up over the years. But if you live in an area where home prices have a history of rising, your home’s equity could continue to go up despite your reverse mortgage. It goes without saying, though, that you can never count on such increases to last forever. As evidence, just consider the housing slump and accompanying foreclosure fallout sweeping real estate markets across the United States.
9. Consider your options. A Home Equity Conversion Mortgage is insured by the federal government, and the money you borrow can be used for any purpose. In addition, more and more banks and mortgage lenders are offering proprietary reverse mortgage products all the time. As you investigate loans, clarify exactly what the fees will be. They can vary wildly – from as low as 2 percent of the loan amount to as high as 7 percent. To bag a lower fee, you may be hit with a higher interest rate, so remember to take that detail into consideration and do the math carefully as you shop around.
10. Inform yourself. To read “Home Made Money,” the AARP’s handy consumer guide to reverse mortgages, visit this site or call 1-800-209-8085 toll-free to order a free copy.
Sources and resources: