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Debt Consolidation - Bill Consolidation
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Reverse
Mortgages
Reverse mortgages allow
you to tap into your equity without having to pay principal and interest.
If
you are age 62 or older and are "house-rich, cash-poor," a reverse mortgage
(RM)
may be an option to help increase your income. However, because your home is such a
valuable asset, you may want to consult with your family, attorney, or financial advisor
before applying for an RM. Knowing your rights and responsibilities as a borrower may help
to minimize your financial risks and avoid any threat of foreclosure or loss of your home.
This brochure explains how RMs work. It describes similarities and differences among the
three RM plans available today: FHA-insured; lender-insured; and uninsured. It also
discusses the benefits and drawbacks of each plan. Each plan differs slightly, so be
careful to choose the plan that best meets your financial needs. Organizations and
government agencies that offer additional information about RMs are listed at the end of
this brochure.
Reverse Mortgages - How They Work
A reverse mortgage is a type of home equity loan that allows you to convert some
of the equity in your home into cash while you retain home ownership. RMs works much like
traditional mortgages, only in reverse. Rather than making a payment to your lender each
month, the lender pays you. Unlike conventional home equity loans, most RMs do not require
any repayment of principal, interest, or servicing fees for as long as you live in your
home. Funds obtained from an RM may be used for any purpose, including meeting housing
expenses such as taxes, insurance, fuel, and maintenance costs.
Requirements and Responsibilities of the Borrower
To qualify for an RM, you must own your home. The RM funds may be paid to you in a lump
sum, in monthly advances, through a line-of-credit, or in a combination of the three,
depending on the type of RM 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.
Because you retain title to your home with an RM, you also remain responsible for taxes,
repairs, and maintenance. Depending on the plan you select, your RM becomes due with
interest either when you permanently move, sell your home, die, or reach the end of the
pre-selected loan term. 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 (if the heirs are eligible) or by using the proceeds from the sale of
your home.
Common Features of Reverse Mortgages
Listed below are some points to consider about
RMs.
* RMs are rising-debt loans. This means that the interest is added to the principal loan
balance each month, because it is not paid on a current basis. Therefore, the total amount
of interest you owe increases significantly with time as the interest compounds.
* All three plans (FHA-insured, lender-insured, and uninsured) charge origination fees and
closing costs. Insured plans also charge insurance premiums, and some impose mortgage
servicing charges. Your lender may permit you to finance these costs so you will not have
to pay for them in cash. But remember these costs will be added to your loan amount.
* RMs use up some or all of the equity in your home, leaving fewer assets for you and your
heirs in the future.
* You generally can request a loan advance at closing that is substantially larger than
the rest of your payments.
* Your legal obligation to pay back the loan is limited by the value of your home at the
time the loan is repaid. This could include increases in the value (appreciation) of your
home after your loan begins.
* RM loan advances are nontaxable. Further, they do not affect your Social Security or
Medicare benefits. If you receive Supplemental Security Income, RM advances do not affect
your benefits as long as you spend them within the month you receive them. This is true in
most states for Medicaid benefits also. When in doubt, check with a benefits specialist at
your local area agency on aging or legal services office.
* Some plans provide for fixed rate interest. Others involve adjustable rates that change
over the loan term based upon market conditions.
* Interest on RMs is not deductible for income tax purposes until you pay off all or part
of your total RM debt.
Reverse
Mortgage Continued
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