I fully realize that it probably sounds too good to be true, and There Ain’t No Such Thing As A Free Lunch (TANSTAAFL) came to mind as soon as you read the title of this article. However, if you’re 62 or older, you may have just found the goose that laid the golden egg.
A reverse mortgage is exactly what the name suggests. Instead of paying a monthly sum of money to a mortgage company, a mortgage company pays you. There are three types of reverse mortgages and they all have the same eligibility requirements.
You must be at least 62 years old, live in and own your home, and sign a contract. You must also have equity in your home, and the inherent interest rate is based on what the lender currently charges for non-reverse mortgages (more on that later). Incidentally, the lender will also have your property appraised, for which you may or may not have to pay fees.
There are no income restrictions as imposed by Social Security and most are tax free as they do not include additional features such as a linked pension. They also don’t affect your Social Security benefits or your Medicare entitlements.
This article only covers the mortgages with no additional features. To learn more about reverse mortgages with added features, consult with a knowledgeable tax professional to reduce your chances of breaking tax laws.
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This instrument, called a reverse mortgage, is actually a loan, which is an interest rate that allows seniors, or as some say, elderly people, to convert some of their equity into cash without having to sell their home. Because it is a “reverse” loan, you receive a monthly payment and do not pay a monthly payment while you live in your home.
However, this loan must be repaid and repaid with interest if you sell, die, change your primary residence, or reach the end of the preselected loan term. You remain responsible for paying property taxes, insurance and all associated maintenance costs, which of course you would have to pay with or without a reverse mortgage.
With that explanation, the picture gets more focused, right? You enjoy a monthly lump sum, tax-free and non-refundable until a future date, while staying in your home. As close to a win-win situation as one can get in this day and age.
You don’t have to be a rocket scientist to realize that someone who is poor in money but rich in homes should at least investigate this tool. However, as with any other instrument that involves your signature on the dotted line, you must have some preliminary information.
I mentioned that there are three types of reverse mortgages. The first is the single purpose reverse mortgage. These are offered by some state and local government agencies and non-profit organizations.
They may not be available in your region. Call your county’s senior services department. Your phone number is on the white pages below the listing for your county.
Single Purpose means just that. Proceeds may only be used for the purpose specified by the lender and are typically only paid out to those on low or middle incomes. When you call your county, be sure to ask if the reverse mortgage is single purpose and what the limits are.
The second type of reverse mortgage is called a home equity conversion mortgage (HECM). The federal government insures these mortgages and they are supported by the Department of Housing and Urban Development (HUD). The upfront costs are generally high, especially if you plan to stay in your home for a short time, but they are not subject to income or medical restrictions and can be used for any purpose.
HECMs also require all applicants to meet with a counselor from an independent, government-licensed housing counseling agency. The FTC says, “The counselor must explain the cost of the loan, the financial implications, and alternatives. For example, advisors should tell you about government or nonprofit programs that you may qualify for and any single-purpose or proprietary reverse mortgages that are available in your area.”
An additional benefit of an HECM mortgage is the nursing home clause. If a borrower needs to move from her home to a nursing home or other medical facility, she has up to 12 months before the loan becomes due. This improves financial planning.
The third type is called a proprietary reverse mortgage. These are personal loans that are secured by the companies that offer them. In other words, they are NOT state insured. As with HECMs, the upfront cost of owning a reverse mortgage could be high.
A reverse mortgage is like a non-reverse mortgage for cost reasons. The lender typically charges loan origination fees, closing costs, insurance premiums (for insured loans), and service fees, all of which are determined by the lender.
Fortunately, like non-reverse mortgages, the Federal Truth In Lending Act (TILA) applies to reverse mortgages. This means that the lender MUST disclose the costs and terms of the reverse mortgage you are considering.
The annual percentage rate (APR) and payment terms must be prominently displayed and not in the fine print. If you choose a line of credit as a loan, lenders must tell you the fees associated not only with opening but also with using that credit account.
A word about the interest rate, since it also reflects the non-reverse mortgage. Just like a non-reverse mortgage, an interest rate can be fixed or variable, with variable rates tied to a financial index. This means that when the index changes, the price changes.
TILA compels the lender to disclose this information. TILA does not force the lender to tell you that the reverse mortgage may or may not use up all of your equity. If the contract has a non-recourse clause, which most have, you must be told that you will not owe more than the value of your home when the loan is repaid. That is a good thing.
Of the three, the HECM is the most flexible. You can choose how you receive your money. For example, you can receive fixed monthly cash advances for a specific period of time or for as long as you live in your home. Or you can get a line of credit if you wish.
With a line of credit, you can withdraw the loan amount when you want and for how much you want. The HECM allows a combination of the two possibilities. You can get a monthly payment plus a line of credit.
The key is to read and understand every clause in the contract before signing it and don’t be afraid to ask questions if you don’t understand something. Don’t let a huge monthly payment cloud your judgment and decision making.
Both HUD and the FTC have toll-free numbers and websites to help you make an informed decision. HUD can be called at 1-888-466-3487 with their web address at:
After reading the information above, you may have decided that the goose with the golden eggs is actually a vulture waiting to pounce on your carcass. Or you may have decided that the goose eggs are worth your time and attention. Either way, you are now a better informed consumer.