Is a Reverse Mortgage...
A Backward Move?
If you own a home and you're in need of some serious cash, a reverse mortgage may be the solution.
In the past, you basically had two options to generate income from owning a home:
Sell your home, take the proceeds and move elsewhere
Borrow against any home equity by taking out a loan and then making loan payments
Now, there's another option to consider that does not require you to leave your home, or make any loan payments. It's called a reverse mortgage.
Many people are now hearing more about this financial tool, so I'll tell you what I know about them so you can make up your own mind.
Reverse mortgages entered the scene in 1989 through the U.S. Department of Housing and Urban Development (HUD). According to HUD reports, there were 157 HECM (home equity conversion mortgage) loans established in 1990. By 2006, that number jumped an additional 76,351.
A reverse mortgage (RM)...
Is a loan
Allows a homeowner, age 62 or older, to tap into accumulated home equity
Lets a homeowner receive an income stream
Requires no move or no loan payments
Here are some benefits you can expect to receive:
Loan proceeds are tax-free
Money can be used for any purpose
Choice of a lump sum, regular monthly payment option, or both
Here are three examples that trigger the loan pay-back:
The house being sold
A permanent move
Death of the owner
The loan obligation at any given time can never exceed the value of the home. Once the loan is repaid, any remaining equity is distributed to the borrower(s) or any heirs. The loan amount is determined by the borrower's age, current interest rate, as well as the home's value and location. An older person can borrow a larger percentage of a home's value.
Although there are no limits on the value of homes qualifying for this type of loan, the amount that can be borrowed will vary. The maximum amount of the loan can be capped depending on the city and county location.
Qualifying is pretty straightforward:
Borrower must be age 62 or older
Own the home free and clear or have a low mortgage balance
Meet with a HUD-approved counseling agency to get and understand loan guidelines
Unlike a typical “forward” mortgage whereby debt decreases and equity increases, an RM has the opposite effect. Debt increases and equity decreases. Like any mortgage, there are origination fees and closing costs. These costs can amount to thousands of dollars. Also, there are different types of loans and interest rates to consider.
It's important to weigh the loan benefits and drawbacks. As appealing as the extra money may seem, there may be disadvantages and unpleasant consequences since you are basically increasing your debt. Taking out an RM can negatively impact your eligibility for public-benefit programs and any inheritance plans you may have for your heirs.
Many important decisions will need to be made when considering an RM, like choosing a loan counselor and a lender. Take your time and make decisions wisely in order to avoid any pitfalls. You may want to involve a close friend, advisor or other family members.
AARP has prepared a good booklet entitled Home Made Money - A Consumer's Guide to Reverse Mortgages. You can request a free copy by calling 1-800-209-8085.
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