Reverse Mortgages: What You Need To Know

Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income. 

A reverse mortgage is a loan against your homes equity that you do not have to pay back for as long as you live there, and are still living.  If you are 62 years or older and own and live in your own home, you are a good candidate for a reverse mortgage loan. 

All reverse mortgages become due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. 

There are fairly standard “conditions of default” such as failure to keep your home insured, upkeep on maintenance and repair, and paying property taxes or special assessments. 

Other potential clauses to consider that can cause default on your loan are: declaration of bankruptcy, donation or abandonment of your home, fraud or misrepresentation, and eminent domain or condemnation involving your home.  Also, renting out part or all of your home, adding a new owner to the title, change of zoning classification, or taking out new debt against your home can cause default.

The only reverse mortgage insured by the US Federal Government is called a Home Equity Conversion Mortgage, or HECM, and is only available through an FHA approved lender. 

FHA tells lenders how much they can lend you based on your age and home value.  The HECM program limits your loan costs, and the FHA also guarantees that lenders will meet their obligations. 

The amount of money you can get depends on the plan or program you select.  It also depends on the kind of cash advances you choose.  These options can include: single lump sum of cash; regular monthly cash advance; a line of “credit” that allows you to decide when and how much cash you want available; or a combination of these payment methods.

The older you are, the more cash you can get.  Also the more your home is worth, the more cash you can get. 

After closing a reverse mortgage, you have three extra days to reconsider your decision.  If for any reason you decide you do not want the loan, you can cancel it.  Your lender can provide you a form to execute the cancellation.   

Of course HECM loans also involve “financing” costs such as loan origination fee, third-party closing costs, a mortgage insurance premium, a servicing fee and, of course, interest.  A lender may require a cash application fee to pay for an appraisal and credit check. 

Reverse mortgages generally must be “first” mortgages (the primary debt against your home). 

The total cost of a reverse mortgage depends on these factors:  How long you live in your home and what happens to its value during that time. 

Three important questions to Ask:

How much would I get?

How much would I pay?

How much would be left at the end of the loan?

http://assets.aarp.org/www.aarp.org_/articles/money/financial_pdfs/hmm_hires_nocrops.pdf