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Produced in cooperation with the American Association of Retired
Persons
and the National Center or Home Equity Conversion
If you are age 62 or older and are "house-rich,
cash-poor," a reverse mortgage (RM) may be an option to help
increase your income. However, because your home is such a
valuable asset, you may want to consult with your family,
attorney, or financial advisor before applying for an RM.
Knowing your rights and responsibilities as a borrower may help
to minimize your financial risks and avoid any threat of
foreclosure or loss of your home.
This brochure explains how RMs work. It describes similarities
and differences among the three RM plans available today:
FHA-insured; lender-insured; and uninsured. It also discusses
the benefits and drawbacks of each plan. Each plan differs
slightly, so be careful to choose the plan that best meets your
financial needs. Organizations and government agencies that
offer additional information about RMs are listed at the end of
this brochure.
How Reverse Mortgages Work
A reverse mortgage is
a type of home equity loan that allows you to convert some of
the equity in your home into cash while you retain home
ownership. RMs works much like traditional mortgages, only in
reverse. Rather than making a payment to your lender each month,
the lender pays you. Unlike conventional home equity loans, most
RMs do not require any repayment of principal, interest, or
servicing fees for as long as you live in your home. Funds
obtained from an RM may be used for any purpose, including
meeting housing expenses such as taxes, insurance, fuel, and
maintenance costs.
Requirements and
Responsibilities of the Borrower
To qualify for an RM,
you must own your home. The RM funds may be paid to you in a
lump sum, in monthly advances, through a line-of-credit, or in a
combination of the three, depending on the type of RM and the
lender. The amount you are eligible to borrow generally is based
on your age, the equity in your home, and the interest rate the
lender is charging.
Because you retain title to your home with an RM, you also
remain responsible for taxes, repairs, and maintenance.
Depending on the plan you select, your RM becomes due with
interest either when you permanently move, sell your home, die,
or reach the end of the pre-selected loan term. The lender does
not take title to your home when you die, but your heirs must
pay off the loan. The debt is usually repaid by refinancing the
loan into a forward mortgage (if the heirs are eligible) or by
using the proceeds from the sale of your home.
Common Features of Reverse
Mortgages
Listed below are some
points to consider about RMs.
* RMs are rising-debt loans. This means that the interest is
added to the principal loan balance each month, because it is
not paid on a current basis. Therefore, the total amount of
interest you owe increases significantly with time as the
interest compounds.
* All three plans (FHA-insured, lender-insured, and uninsured)
charge origination fees and closing costs. Insured plans also
charge insurance premiums, and some impose mortgage servicing
charges. Your lender may permit you to finance these costs so
you will not have to pay for them in cash. But remember these
costs will be added to your loan amount.
* RMs use up some or all of the equity in your home, leaving
fewer assets for you and your heirs in the future.
* You generally can request a loan advance at closing that is
substantially larger than the rest of your payments.
* Your legal obligation to pay back the loan is limited by the
value of your home at the time the loan is repaid. This could
include increases in the value (appreciation) of your home after
your loan begins.
* RM loan advances are nontaxable. Further, they do not affect
your Social Security or Medicare benefits. If you receive
Supplemental Security Income, RM advances do not affect your
benefits as long as you spend them within the month you receive
them. This is true in most states for Medicaid benefits also.
When in doubt, check with a benefits specialist at your local
area agency on aging or legal services office.
* Some plans provide for fixed rate interest. Others involve
adjustable rates that change over the loan term based upon
market conditions.
* Interest on RMs is not deductible for income tax purposes
until you pay off all or part of your total RM debt.
How Reverse Mortgages Differ
This section
describes how the three types of RMs -- FHA-insured,
lender-insured, and uninsured -- vary according to their costs
and terms. Although the FHA and lender-insured plans appear
similar, important differences exist. This section also
discusses advantages and drawbacks of each loan type.
* FHA-insured. This plan offers several RM
payment options. You may receive monthly loan advances for a
fixed term or for as long as you live in the home, a line of
credit, or monthly loan advances plus a line of credit. This RM
is not due as long as you live in your home. With the line of
credit option, you may draw amounts as you need them over time.
Closing costs, a mortgage insurance premium and sometimes a
monthly servicing fee is required. Interest is charged at an
adjustable rate on your loan balance; any interest rate changes
do not affect the monthly payment, but rather how quickly the
loan balance grows over time.
The FHA-insured RM permits changes in payment options at little
cost. This plan also protects you by guaranteeing that loan
advances will continue to be made to you if a lender defaults.
However, FHA-insured RMs may provide smaller loan advances than
lender-insured plans. Also, FHA loan costs may be greater than
uninsured plans.
* Lender-insured. These RMs offer monthly loan
advances or monthly loan advances plus a line of credit for as
long as you live in your home. Interest may be assessed at a
fixed rate or an adjustable rate, and additional loan costs can
include a mortgage insurance premium (which may be fixed or
variable) and other loan fees.
Loan advances from a lender-insured plan may be larger than
those provided by FHA-insured plans. Lender-insured RMs also may
allow you to mortgage less than the full value of your home,
thus preserving home equity for later use by you or your heirs.
However, these loans may involve greater loan costs than
FHA-insured, or uninsured loans. Higher costs mean that your
loan balance grows faster, leaving you with less equity over
time.
Some lender-insured plans include an annuity that continues
making monthly payments to you even if you sell your home and
move. The security of these payments depends on the financial
strength of the company providing them, so be sure to check the
financial ratings of that company. Annuity payments may be
taxable and affect your eligibility for Supplemental Security
Income and Medicaid. These "reverse annuity mortgages" may also
include additional charges based on increases in the value of
your home during the term of your loan.
* Uninsured. This RM is dramatically different
from FHA and lender-insured RMs. An uninsured plan provides
monthly loan advances for a fixed term only -- a definite number
of years that you select when you first take out the loan. Your
loan balance becomes due and payable when the loan advances
stop. Interest is usually set at a fixed interest rate and no
mortgage insurance premium is required.
If you consider an uninsured RM, carefully think about the
amount of money you need monthly; how many years you may need
the money; how you will repay the loan when it comes due; and
how much remaining equity you will need after paying off the
loan.
If you have short-term but substantial cash needs, the uninsured
RM can provide a greater monthly advance than the other plans.
However, because you must pay back the loan by a specific date,
it is important for you to have a source of repayment. If you
are unable to repay the loan, you may have to sell your home and
move.
Reverse Mortgage Safeguards
One of the best protections
you have with RMs is the Federal Truth in Lending Act, which
requires lenders to inform you about the plan's terms and costs.
Be sure you understand them before signing. Among other
information, lenders must disclose the Annual Percentage Rate
(APR) and payment terms. On plans with adjustable rates, lenders
must provide specific information about the variable rate
feature. On plans with credit lines, lenders also must inform
you of any charges to open and use the account, such as an
appraisal, a credit report, or attorney's fees.
Source
ftc.gov
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