Real Estate
For many individuals, their home represents their most significant investment. However, for older Americans who are cash-poor and house-rich, the option of converting their home equity into ready cash is becoming more appealing. Fortunately, reverse mortgages provide a solution that allows seniors to access tax-free cash without selling their homes, and without the burden of monthly payments. The American Association of Retired Persons (AARP) defines reverse mortgages as loans borrowed against the home that don’t require repayment as long as the individual resides in the property.
Celebrities such as James Garner and Robert Wagner endorse various reverse mortgage loans for older Americans. However, the AARP is a more objective source of information regarding the subject. Many seniors face mounting medical expenses, the need to supplement their Social Security benefits, or unexpected home repairs. Before the introduction of reverse mortgages in the late 1980s, retired homeowners had limited options. They could sell their homes and purchase a smaller property, move in with family, or borrow against their home equity, which required monthly repayments.
Reverse mortgages have become increasingly popular, with the number of reverse mortgages increasing from 18,000 in 2003 to over 107,000 in 2007 [source: U.S. Department of Housing and Urban Development]. In this article, we explore the different types of reverse mortgages available, their eligibility requirements, and the amount of cash a homeowner can expect. We also consider the various factors that individuals should contemplate before cashing in on their home equity.
Different Types of Reverse Mortgages
Fannie Mae is the investor in two reverse mortgage programs, HUD’s HECM and Fannie Mae’s Home Keeper reverse mortgage.
Alex Wong/Getty Images
There are three main types of reverse mortgages:
There are three types of reverse mortgages: Single-Purpose Reverse Mortgages, Proprietary Reverse Mortgages, and Home Equity Conversion Mortgages (HECMs). Single-Purpose Reverse Mortgages are limited to a single purpose and have income restrictions. Proprietary Reverse Mortgages have fewer restrictions but come with substantial upfront fees and monthly service fees. HECMs are insured by the Federal Housing Administration and are the only reverse mortgages guaranteed by the government. To qualify for a reverse mortgage, you must be at least 62 years old, own your home, and occupy it as your principal residence. The amount of cash you receive depends on your age, location, and home value. The AARP provides a reverse mortgage calculator to help compare estimates. Unlike a home equity loan, a reverse mortgage does not require monthly mortgage payments. The benefits of a reverse mortgage include ready cash for retirees facing financial difficulties, but risks include high upfront fees and the possibility of losing the home.
Advantages
- You can access the equity in your home without having to pay back the loan, as long as your home is your primary residence.
- In most situations, the loan does not have to be repaid until the last surviving borrower passes away, sells the home, or permanently moves out.
- The payout advances are not subject to taxation and do not pose a risk of losing Social Security or Medicare benefits.
- With most programs, there are no limitations on how you can use the money.
Disadvantages
- The upfront costs are generally much higher than traditional mortgages and are often paid out of the home’s equity, reducing the amount of cash available.
- You are still responsible for paying real estate taxes, homeowners’ insurance, and home maintenance. Failure to maintain the home properly may result in the lender taking back the property.
- You are responsible for costly mortgage insurance, which protects the lender if the property’s value decreases or you hold the mortgage for an extended period.
- As the interest on a reverse mortgage continues to accrue, the debt increases, and the equity decreases. This will reduce assets for your heirs, as the loan balance must be paid off when you permanently move out or pass away. However, you or your estate cannot owe more than the home’s appraised value when it’s sold.
- In some cases, you can lose your home if you leave it for an extended period to stay in a nursing home, rehabilitation center, or hospital. Even if you plan to return home, the lender can demand payment of the full loan balance plus interest.
Before making a decision that could affect your financial security and future, gather all the facts. First, explore other options available to meet your needs. For example, if you need a new furnace and don’t have the cash, there may be state or local assistance programs available. You may also qualify for a deferred payment program if you cannot pay your property taxes.
If you determine that a reverse mortgage is the best option, compare several different plans and discuss your requirements with your family and a reverse mortgage counselor. AARP provides counseling through the HUD network of HECM counselors. You can contact a counselor by calling 1-800-209-8085 during weekdays and requesting reverse mortgage counseling [source: AARP].
For additional information about reverse mortgages and related topics, see the links on the following page.
From American Dream to American Nightmare
The rise of the reverse mortgage industry has also led to an increase in unscrupulous salespeople seeking to make quick and often substantial commissions. Aggressive sales tactics may pressure you into making decisions that you do not fully comprehend, often with catastrophic consequences. Consult an independent financial adviser or reverse mortgage counselor before signing away the equity in your home.
Originally Published: Aug 6, 2008
Answers to Common Questions about Reverse Mortgages
There are three types of reverse mortgages available: single-purpose reverse mortgages provided by local or state governments and nonprofit groups, proprietary reverse mortgages offered by private companies, and home equity conversion mortgages (HECMs) insured by the Federal Housing Administration. The amount of cash you receive depends on several factors such as your age, location of your house, and its value. To determine how much money you might get, you can use the AARP’s reverse mortgage calculator. However, there are several drawbacks to reverse mortgages, including high upfront costs, costly mortgage insurance, real estate taxes, homeowners’ insurance, and home maintenance costs. Additionally, as interest continues to accrue and compound over time, less equity will be available for your heirs when the loan balance must be paid off upon your permanently moving out or passing away. Although it is unclear who invented the reverse mortgage, the first one was given in 1961 to a woman in Maine by a small local bank to help her stay in her home after her husband passed away. If you have not finished paying off an existing mortgage and are at least 62 years old, you may still qualify for a reverse mortgage. Some seniors take a reverse mortgage to pay off their first mortgage, but it is important to compare multiple offers and speak to a real estate lawyer to avoid making costly mistakes.
Additional Resources
Related HowStuffWorks Articles
- How Home Equity Loans Work
- How Mortgages Work
- How Credit Reports Work
- How Baby Boomers Work
- How to Retire Early
- How Social Security Works
- How Medicare Works
- How REITs Work
More Great Links
- Reverse Mortgage Calculator estimates
- Money from Home: A Guide to Understanding Reverse Mortgages
- Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity
- Top Ten Things to Know if You’re Interested in a Reverse Mortgage
Sources
- American Association of Retired Persons (AARP). “A New Kind of Loan: In Reverse” http://www.aarp.org/money/revmort/revmort_basics/a2003-03-21-newloan.html (Accessed 5/3/08)
- American Association of Retired Persons (AARP). “Glossary of Reverse Mortgage Terms.” http://www.aarp.org/money/revmort/revmort_basics/a2003-03-28-revmortglossary.html (Accessed 5/2/08)
- American Association of Retired Persons (AARP). “Reverse Mortgage Calculator.” http://www.rmaarp.com/ (Accessed 5/3/08)
- Dugas, Christine. “Reverse Mortgages aren’t for everyone.” USA TODAY. 1/17/08. http://www.usatoday.com/money/perfi/retirement/2008-01-17-boomer-reverse-mortgages_N.htm (Accessed 5/3/08)
- FannieMae. “Money from home: A guide to understanding reverse mortgages.” http://www.fanniemae.com/global/pdf/homebuyers/moneyfromhome.pdf (Accessed 5/4/08)
- Federal Trade Commission: Consumer Protection. “Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity. http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm (Accessed 5/3/08)
- Hansen, Liane. “Some Seniors Victimized in Reverse Mortgage Boom.” NPR: Weekend Edition. 3/9/08. http://www.npr.org/templates/story/story.php?storyId=87994065 (Accessed 5/3/08)
- Munnell, Alicia H. “The role in government in life-cycle saving and investing.” The Future of Life.
The Cycle Saving and Investing conference was sponsored by Boston University, the Federal Reserve Bank of Boston, and the Research Foundation on October 26-27, 2006. Links to various sources were provided, including U.S. Census Bureau projections by age, sex, race, and Hispanic origin, information on home equity conversion mortgages (HECMs) and reverse mortgages for seniors from the U.S. Department of Housing and Urban Development, and an article from American Medical News discussing the popularity of reverse mortgages. All of these sources were accessed on May 3, 2008.
FAQ
1. What is a reverse mortgage?
A reverse mortgage is a loan that allows homeowners aged 62 and older to convert a portion of their home equity into cash without having to sell their home or make monthly mortgage payments. Instead, the loan is repaid when the borrower no longer occupies the home as their primary residence, such as when they sell the home or pass away.
2. How do I qualify for a reverse mortgage?
To qualify for a reverse mortgage, you must be at least 62 years old, own your home outright or have a low mortgage balance that can be paid off with the proceeds from the reverse mortgage, and live in the home as your primary residence.
3. How much money can I receive from a reverse mortgage?
The amount of money you can receive from a reverse mortgage depends on several factors, including your age, the value of your home, and current interest rates. Generally, the older you are and the more valuable your home is, the more money you can receive.
4. What are the different types of reverse mortgages?
There are three main types of reverse mortgages: single-purpose reverse mortgages, proprietary reverse mortgages, and federally-insured Home Equity Conversion Mortgages (HECMs). HECMs are the most common type of reverse mortgage and are insured by the Federal Housing Administration.
5. What are the fees associated with a reverse mortgage?
The fees associated with a reverse mortgage include origination fees, mortgage insurance premiums, appraisal fees, and closing costs. These fees can vary depending on the lender and the type of reverse mortgage.
6. Will I still own my home if I get a reverse mortgage?
Yes, you will still own your home if you get a reverse mortgage. However, the lender will have a lien on your home, which means they can sell the home to recoup the loan balance if you pass away or no longer occupy the home as your primary residence.
7. How is the loan repaid?
The loan is typically repaid when the borrower no longer occupies the home as their primary residence. This can occur when they sell the home, pass away, or move out for more than 12 months. The loan balance is then paid off using the proceeds from the sale of the home or other assets.
8. Can I use the money from a reverse mortgage for anything?
Yes, you can use the money from a reverse mortgage for anything you choose. Some common uses include paying off debt, covering medical expenses, or supplementing retirement income.
9. What happens if the loan balance exceeds the value of my home?
If the loan balance exceeds the value of your home, you or your heirs are not responsible for the difference. The FHA insurance will cover any shortfall, so you will never owe more than the value of your home.
Brody is a skilled craftsman and gardening expert. From renovating living spaces to cultivating lush gardens, Brody’s knowledge and passion shine through, inspiring readers to embark on their own home improvement and gardening journeys with confidence.
Leave a Reply