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With the cost of everything going up and the purchasing power of retirement funds shrinking, people are taking a hard look at reverse mortgages. A reverse mortgage is the opposite of a traditional mortgage. Instead of you, the borrower, making monthly mortgage payments, the lender pays the borrower. It offers a way to get money from your home without having to sell and move, or borrow, which would leave you with monthly loan payments. For a reverse mortgage, your income and credit history are irrelevant. What matters is how much equity (the value of the home minus debt) you have in your home. To qualify for a federally insured reverse mortgage, you must be at least 62 years old and live in your home. Reverse mortgages don’t require a good credit score. In fact, borrowers with bad credit pay the same rate as those with perfect credit. Depending upon the program you could receive a lump sum, a line of credit, or monthly payments. Also, the money won’t have to be repaid until you sell your home, stop living in it, or die. Because the proceeds of a reverse mortgage are a loan and not income, they are tax-free. Social Security and Medicare usually are not affected. (Consult your tax advisor regarding your situation.) Reverse mortgages are a $20 billion industry. Many companies are marketing reverse mortgages as a way for seniors to cash in on their equity. According to the National Reverse Mortgage Lenders Association, more than 112,000 reverse mortgages were sold in 2008. Some reverse mortgages, called Home Equity Conversion Mortgages, are federally insured. Private reverse mortgages are backed by private companies. And single purpose reverse mortgages may be offered through government agencies or nonprofits. While the fees involved in securing a reverse mortgage aren’t as high as those associated with selling your home, they are substantial. If leaving an unencumbered home to your heirs is important, keep in mind that a reverse mortgage can deplete the equity from the home. You should carefully consider the requirements for reverse mortgages. For example, the FHA/HECM (Home Equity Conversion Mortgage) program requires that each homeowner/borrower be at least 62 years of age. But one if one party is 62 or older and the other is not? Some loan officers will tell you, correctly, that it can’t be done. But it can be done if you take the person who is not yet 62 off the title, which means that person is no longer an owner of the home. However this choice can have potentially serious consequences and you should seek professional advice before pursuing that option. If, for example, the younger person is taken off the title and then passes away first, the reverse mortgage will not be affected. But if the person who was the reverse mortgage borrower dies first, beware. The loan becomes due upon sale, death of the surviving borrower, or when the home is no longer the primary residence of each borrower. So if the borrower dies, the loan has to be paid in full, which could place the remaining partner in a precarious position. In other situations, if you are the only borrower and have been living in a nursing home or assisted living center for 12 months or more, this may trigger repayment of your reverse mortgage. According to the Office of Minnesota’s Attorney General, in February, 2008, the U.S. Senate Committee on Aging held a hearing on the subject of reverse mortgages. At this hearing, stories were told of seniors whose assets were depleted and unavailable. In addition, some unscrupulous companies have convinced seniors to purchase a reverse mortgage and then put the proceeds into dubious investments. Borrowers may not realize that interest charges are added to the loan daily, which may lead to a substantial loan over time. Depending on how long you live in your home, the reverse mortgage may grow to equal the value of your home. Because you make no monthly payments, the amount you owe continues to grow. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your “equity”) grows smaller. But you generally cannot owe more than your home’s value at the time the loan is repaid. Also, remember that getting a reverse mortgage means you still own your house, therefore, you are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in full. Remember, reverse mortgages are good for some people, but not for everyone. If you believe that a reverse mortgage is right for your situation, make sure you understand exactly how it will work. Choose a reputable lender who doesn’t try to cross-sell other products such as annuities. Get quotes from several lenders and learn how to compare the disclosures. For specifics and independent advice, speak with a CPA or other tax professional as well as an attorney who specializes in elder law. Q&A Why do you want a reverse mortgage? Can you afford the reverse mortgage fees? Do you have enough equity in your home for a reverse mortgage? Is there another way you can borrow the money you need, such as a home equity line, which might actually cost less in the long run? How is your credit rating and income? How long will you be in your home? Resources At www.reverse.org, the National Center for Home Equity Conversion Mortgage offers independent information on reverse mortgages for consumers, their families, professional advisors, and nonprofit counselors. NCHEC is a nonprofit organization with no ties to the reverse mortgage lending industry. National Reverse Mortgage Lenders Association, a national nonprofit trade association that represents lenders that make reverse mortgages, offers a number of free consumer guides. Call 1-866-264-4466 to request or download copies at www.reversemortgage.org Office of Minnesota Attorney General
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Reverse Mortgage