If you are age 62 or older, you may have heard about reverse mortgages. And what you’ve heard may sound too good to be true: Instead of making monthly payments to the bank, the bank pays you.
A reverse mortgage is basically a tax-free advance on your home equity. For some people, a reverse mortgage can offer financial freedom to enjoy their later years without worrying about income. For others, it can provide much needed help for staying in their homes. The money from a reverse mortgage can be used to provide help in meeting medical or caregiving expenses, or to help defray tax payments or home maintenance costs.
What you need to understand is that even though you start out on the receiving end, you are still making a contract for a loan. And there will come a time when it has to be repaid.
Before you decide to draw down on your equity, you need to know a few things:
Pay attention to the details:
- There are fees and other costs. These can be rolled into the reverse mortgage, but they will affect how much money you ultimately receive.
- You will owe more over time. As you borrow against your equity, interest accrues on the total you have borrowed. The more you borrow, the more interest is charged to the loan. Unlike your traditional mortgage, this interest is not tax deductible each year. You must wait until the loan is paid off.
- Interest rates may change over time. Variable rate loans may give you more options for how you get your money, but depending on the financial markets, the interest you pay may increase substantially.
- You keep the title to your home. That means you remain responsible for all costs of ownership: taxes, insurance, maintenance, HOA fees and other expenses. In some cases, the lender will “set aside” part of the amount you have borrowed to ensure these expenses will be met. This will reduce the amount you can access through the loan.
- Think about your spouse. If you die, your spouse can usually remain in the home, as long as taxes are paid and the home is maintained. If your spouse isn’t on the loan, the payments will stop.
- Think about your heirs. You are borrowing against the equity in your home, which means that when it is sold and the reverse mortgage is repaid, there may be very little profit to disburse through your estate.
Know the types of loans available.
- Single Purpose Reverse Mortgage. Offered by some state and local agencies, this type of loan may be used only for reasons that are specified by the lender, such as home improvements. So if you need extra cash for home repairs, improvements or to get caught up on tax payments, this may be the easiest and least expensive option. Go to eldercare.gov, enter your zip code and search “home repair and modification” to find agencies that can advise you.
- Proprietary Reverse Mortgages are backed by private companies. These are more expensive than single purpose reverse mortgages, but if your home has a high appraisal and you have a lot of equity, you can often qualify for more funding.
- Home Equity Conversion Mortgages (HECM) are federally insured mortgages backed by the U.S. Department of Housing and Urban Development (HUD). Depending on your age, the equity you have in your home and how long you intend to remain in it, you can get a reverse mortgage even if you still owe money on your original loan. These types of loans are very flexible in how you receive the money:
- Single disbursement at a fixed rate, meaning you get a lump sum all at once.
- “Term” payments, meaning you get fixed monthly cash payments for a specific amount of time.
- “Tenure” payments, meaning you get fixed monthly payments for as long as you remain in your home.
- Line of credit, meaning you can draw as much as you want, whenever you want, up to the credit limit. This option lets you manage how much interest you pay, since you will owe interest only on the amount of credit you are using.
Before you can apply for an HECM, you must consult with a government-approved independent counselor. HUD offers a list of counselors, or you can call the agency at 1-800-569-4287.
Be a smart consumer.
- Compare fees and costs. Shop around and make sure you are getting the kind of loan that is right for your situation.
- Beware of the hard sell. Unscrupulous brokers may target older people and offer high-cost loans. If a salesman tries to convince you that a reverse mortgage can be used to free up money for investment in other financial products, like annuities or long-term care insurance, walk away.
- Understand the total loan costs and repayment structure. A lender can show you the projected annual average total cost of your loan, including interest and itemized expenses. Remember that these costs will reduce the amount of money available to you each year.
- Make sure you understand your right to cancel. Like standard mortgages, a reverse mortgage should offer you a certain number of days during which you can cancel without penalty. This is called your “right of rescission.” If you decide to back out of the loan agreement, you must notify the lender in writing. Send your letter by certified mail, return receipt requested. The lender will then have a certain number of days, usually 20, to return any money you have paid in the process of securing the loan.
Robert Massi joined Fox News Channel (FNC) in 1996 and currently serves as a legal analyst as well as host of Bob Massi is the Property Man, part of FNC's weekend lineup (Saturday, 12 p.m. ET / encore Sunday, 3 p.m. ET). The program highlights the various facets of the housing industry and features experts who break down current property trends and pricing deals. Massi appears weekly on Fox & Friends for his segments "Rebuilding Dreams" and "Legal Ease" along with appearing at other times on Fox News Channel and Fox Business Network (FBN) for real estate and legal segments.