Many seniors today are “house rich and cash poor.” You may have built up equity in your home or paid off your mortgage entirely, yet you may not have money for daily living expenses, home repairs, medical bills, or simply to take a vacation. Well, if you are 62 or older, there is something called a “reverse mortgage,” which can get you cash for the equity you have built up in your home without regard to your income. However, there are serious questions to consider before applying for a reverse mortgage.
WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a special type of loan available to 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. With a reverse mortgage, the equity built up over years of home mortgage payments can be paid to you. Unlike a traditional home equity loan or second mortgage, however, repayment is not required until you sell your home, move out permanently, or die. In a reverse mortgage the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application. The lender pays you the money either in a lump sum, in monthly installments, as a line of credit, or in a combination of these methods.
ELIGIBILITY FOR A REVERSE MORTGAGE
To be eligible for a reverse mortgage, the borrower must be a homeowner, 62 or older, own outright (or have a low mortgage balance that can be paid off at the time of closing with the proceeds from the reverse loan) and live in his or her home. The reverse mortgage funds may be paid to you in a lump sum, in monthly advances, through a line of credit, or in a combination of the above depending on the type of reverse mortgage and the lender. The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging. You retain title to your home with a reverse mortgage. You also remain responsible for taxes, repairs and maintenance. The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually repaid by refinancing the loan into a forward mortgage (a traditional mortgage) or by using the proceeds from the sale of your home. Your heirs will keep all of the money in excess of the amount owed on the loan.
THE DIFFERENCE BETWEEN A REVERSE MORTGAGE AND A HOME EQUITY LOAN
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly repayments. So you don’t need a minimal amount of income to qualify for a reverse mortgage — you could have no income at all and still be able to get a reverse mortgage. With most home loans you could lose your home if you don’t make monthly payments. But with a reverse mortgage, since there aren’t any monthly repayments to make, you can’t lose your home. Most reverse mortgages require no repayment for as long as you, or any co-owner, live in the home. An important feature of a reverse mortgage is that the lender cannot take your home away if you outlive the loan. You do not need to repay the loan as long as you or one of the borrowers continue to live in the house and keep the taxes and insurance current. You can never owe more than your home’s value. In other words, if there is no equity in your home after it is sold, none of you estate’s other assets will be affected by a reverse mortgage, and the debt will never be passed along to your estate or heirs.
CONSIDERATIONS WHEN THINKING ABOUT A REVERSE MORTGAGE
Reverse mortgages are more expensive and complex than traditional loans. Before applying for a reverse mortgage you should consider the following:
Cost. The cost of obtaining a reverse mortgage can be very high. Costs include origination fees and closing costs. You may have to pay some of these costs in cash. Most lenders allow a portion of these costs to be financed as part of the loan balance. In addition, interest, insurance and service charges will be added to the monthly loan balance. Thus, the amount you owe the lender increases over time. Be sure to compare offers for reverse mortgages, because reverse mortgages may vary widely in cost. Of course, the cost of the loan affects how much cash you ultimately receive from the loan.
Inheritance. A reverse mortgage may not be right for you if you want to leave your home, free and clear, to your children or others who will inherit from you. Your relatives will not be able to inherit your home from you unless they pay off the loan after you have passed away.
Responsibility. With a reverse mortgage you will retain title to your home and continue to be responsible for paying the property taxes, insurance, and for the general upkeep of the property.
Eligibility. A reverse mortgage may affect your continued eligibility for need-based government benefits programs such as supplemental social security (SSI) and Medicaid. You should contact your benefits provider to ask how a reverse mortgage may affect your eligibility.
Scams. Beware of reverse mortgage scams! For example, some senior home owners have been contacted by firms offering to assist them in finding a lender that does reverse mortgages in exchange for a “small percentage” of the loan. Stay away from these so-called offers.
HOW MUCH CAN SOMEONE EXPECT TO RECEIVE FROM A REVERSE MORTGAGE LOAN?
A good calculator to help you approximate how much you might be able to receive from a reverse mortgage loan can be found at the following web site: http://www.rmaarp.com/. Simply answer the questions, and it will provide you with an approximation of how much your loan might be. When seeking a reverse mortgage, check with several lenders so that you are sure you are getting the most for your home’s value.
HELP IS AVAILABLE:
Free counseling is available from a HUD-approved housing counseling agency. For referral to a HUD-approved housing counseling agency call 1-888-466-3487. You can also contact the AARP at www.aarp.org and the FTC at www.ftc.gov.
Alan Kopit is a consumer attorney with the firm Hahn Loeser and Parks LLP in Cleveland, Ohio and a regular contributor to “Today.”