What is a Reverse Mortgage?

Reverse mortgages are a way for seniors to get cash from their homes without having to sell them and move, or borrow against them and make monthly loan repayments. They are a great way for homeowners who are house-rich, but cash-poor, to stay in their homes and still meet their financial obligations.

A reverse mortgage is a loan that allows you to convert some of the equity in your home into cash. It is special type of loan for senior homeowners (most require the borrower to be at least 62 years old) that use a home's equity as collateral and you do not have to repay the loan as long as this home remains your principal residence. You repay the loan, plus interest, when you die, sell your home, or permanently (means you have not lived in your home for 12 months in a row) move to another home.

How Much Money Can you Expect to Get with a Reverse Mortgage?

The amount of cash you can get depends on your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. On the other hand, the least cash generally goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high.

For most reverse mortgages you have choices regarding how the loan is paid to you. You can get an immediate cash advance at closing: a lump sum of cash paid to you on the first day of the loan. You can get a line of credit that lets you take cash advances whenever you choose during the life of the loan, until you use it all up. Or, you can set up a monthly cash advance for a specific number of years that you select, or for as long as you live in your home. Lastly, you can choose any combination of immediate cash advance, line of credit, and monthly cash advance.

Is the Money Taxed?  What are my Repayment Obligations?

Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments.

The loan does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. The estate inherits all remaining equity. The estate is not liable if the home sells for less than the balance of the reverse mortgage. 

The Different Types of Reverse Mortgages

There are three basic types of reverse mortgages: federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs); single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.

The most popular reverse mortgage is the federally insured Home Equity Conversion Mortgage (HECM) and offered by most mortgage companies and banks. This loan is backed by the U. S. Department of Housing and Urban Development (HUD) and can be used for any purpose.

• Single purpose reverse mortgages are low cost loans that are offered by some state and local governments. They generally must be used for one specific purpose only for example, to pay for home repairs, improvements, or property taxes. Many of these loan programs are only available to homeowners with low or moderate incomes.
• Proprietary reverse mortgages are owned and backed by the private companies that have created them. These loans can be used for any purpose and are generally the most expensive type of reverse mortgage.
• HECMs and proprietary reverse mortgages are more expensive than other home loans, with proprietary loans being the most expensive. The start-up costs can be high, so these reverse mortgages can become costly if you stay in your home for just a short time. They are widely available, have no income or medical requirements, and can be used for any purpose.

Federal Truth-in-Lending law requires reverse mortgage lenders to disclose the projected annual average cost of these loans in a way that includes ALL of the costs and benefits, and also takes into account the nonrecourse limits (this prevents either you or your estate from owing more than the value of your home when the loan is repaid).

This Total Annual Loan Cost (TALC) disclosure combines all of a reverse mortgage's costs into a single annual average rate. TALC disclosures can be useful when comparing one type of reverse mortgage to another.

Just remember, reverse mortgage borrowers are still homeowners and because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don't pay property taxes or maintain homeowner's insurance, you risk the loan becoming due and payable.

Be Wary of Hard-Sell Reverse Mortgage Scams

Recently there have been a number of financial firms aggressively promoting reverse mortgages with the help of celebrity spokespersons. Their "pitch" suggests that seniors looking for a little extra cash "to do the special things you've always wanted to do, such as travel or hobbies" should utilize a reverse mortgage that they can can help arrange. Unfortunately, these loans typically involve large fees and other onerous requirements. If you are considering a reverse mortgage, the easiest and smartest thing to do is contact a HUD approved counselor at 800-569-4287 or www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm. See this article for more information on avoiding loan modification and foreclosure scams.

This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.

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• What Is A Deed-In-Lieu?
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• $8,000 Tax Credit for First Time Homebuyers
• First Time Homebuyers Guide
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