A reverse mortgage is one of many vehicles that individuals 62 years of age
or older can use to turn the equity in their home into cash. It is very
important, though, for an individual to fully understand reverse mortgages,
their ramifications, and the alternatives. This article will provide an overview
of reverse mortgages, as well as discuss alternatives.
What is a Reverse Mortgage?
With a "normal" home loan you pay a monthly amount (principal and interest).
With each month, the amount that you owe goes down and the equity in your home
goes up. As one might expect from its name, a reverse mortgage works in an
opposite fashion. With a reverse mortgage you can turn the equity in your home
into cash. You do not have to make monthly payments. The cash may be paid to you
in one or more of the following ways:
- As a single lump sum payment
- As a regular monthly amount (a cash advance)
- As a credit line account that you draw upon as needed
With a reverse mortgage, the homeowner continues to own their home and
receives cash in whatever way is preferable to them. As they receive cash, their
loan amount goes up, and the equity in their home declines. A reverse mortgage
cannot grow to more than the amount of the equity of the house. In addition, a
lender cannot seek payment of the loan from anything other than the value of the
house. Your other assets and the assets of your heirs are protected by what is
called a "non-recourse limit."
A reverse mortgage, plus accrued interest, does eventually have to get paid
back. Repayment of a reverse mortgage happens when the last owner of the
property named on the loan either dies, sells the home, or permanently moves out
of the home. Before then, nothing needs to be paid on the loan.
There are other circumstances in which reverse mortgage lenders can also
require repayment of a loan prior to the above conditions. These include:
- The borrower fails to pay their property taxes
- The borrower fails to maintain and repair their home
- The borrower fails to keep their home insured
There are also other default conditions that can cause repayment of the loan.
Most of these are similar to default conditions for traditional mortgages (for
example, declaration of bankruptcy, donation or abandonment of the home,
perpetration of fraud or misrepresentation, and more).
A reverse mortgage should not be confused with a home equity loan or home
equity line, both of which are other means of obtaining money for the equity in
your home. With either of these loan vehicles, an individual must pay at least
monthly interest on the loan amount received, or amount that they have drawn on
their equity line.
Reverse Mortgage Eligibility
All owners of a home must apply for the reverse mortgage and sign the
appropriate loan papers. To qualify for a reverse mortgage the borrower(s)
must:
- Own their own home
- Be at least 62 years of age or older
A reverse mortgage is most typically a "first" mortgage, meaning that there
cannot be any other mortgages or loans against the property, such as an equity
line. An individual typically owns their home "free and clear" prior to seeking
a reverse mortgage.
Reverse Mortgage Loan Amounts
The amount of money that an individual may receive from a reverse mortgage is
a function of many different factors, including:
- The specific reverse mortgage program that the individual selects
- The type of cash advances received (e.g., lump sum vs. monthly payment)
- The individuals age (the older an individual is, the more cash they get)
- The value of the individuals home (the more valuable the home, the more
cash they get)
Types of Reverse Mortgages
There are several different types of reverse mortgages. Some are more
expensive than others. Types of reverse mortgages include:
- Reverse mortgages offered by state and local governments (often called
"single purpose reverse mortgages"). These are typically the least expensive
reverse mortgages. These may be the most restrictive on how the money received
can be used.
- Federally insured Home Equity Conversion Mortgages (HECM). These are almost
always less expensive than other private sector reverse mortgages, but more
expensive than reverse mortgages obtained from state and local governments.
- Other private sector (proprietary) reverse mortgages.
Alternatives to Reverse Mortgages
While usually an option that causes a negative emotional reaction, selling a
home is an alternative to a reverse mortgage. The proceeds of the sale can be
used to either rent, or purchase a smaller, more "age-friendly" home, while
money leftover can be invested to provide additional income. This option should
at least be considered and compared to a reverse mortgage so that an individual
is making an informed decision.
Reverse Mortgage Counseling
Counseling is required in order to obtain certain types of reverse mortgages.
Counseling is required before an individual can obtain a Federally-insured Home
Equity Conversion Mortgages (HECMs). Even if counseling is not required for a
particular reverse mortgage, individuals considering a reverse mortgage should
seek either counseling or the advice of a qualified financial adviser.
Good Sources of Information About Reverse Mortgages
The American Association of Retired Persons (AARP) is an excellent resource
for finding more information on reverse mortgages. Their web site (www.aarp.org)
has extensive information on the subject. Information may also be found on the
National Reverse Mortgage Lenders Association web site
(www.reversemortgage.org), the HECM Resources site
(www.hecmresources.org/index.cfm), the National Center for Home Equity
Conversion web site (www.reverse.org), and the Federal Trade Commission
(www.ftc.gov/bcp/conline/pubs/homes/rms.htm).
Rob Pirozzi is a contract writer for CityTownInfo.com. CityTownInfo is a quick reference web site that provides
statistics and indexes on thousands of cities and towns across the US, as well
as articles, comments from local residents, and more. The web site may be found
at: http://www.citytowninfo.com/.
