Advantages and Disadvantages of a Reverse Mortgage

HUD's Federal Housing Administration (FHA) was among the first to offer a reverse mortgage. FHA's Home Equity Conversion Mortgage (HECM) enables you to cash out some of the equity in your home. The cash can be used: to supplement social security, meet unexpected medical expenses, make home improvements. Reversed mortgages are also called reverse annuity mortgages.

AARP offers free information on reverse mortgages at (800) 209-8085. Here is some information to help you decide if one is right for you!

1. What is a reverse mortgage?

The money you receive from a reversed mortgage is tax-free.

2. Can I use the cash from my reverse mortgage to buy another home?

Yes. The borrower can use the cash to purchase another residence if the purchase can be made without the need for any additional loans.

3. Would I qualify for FHA's HECM reverse mortgage?

Here are the basic qualifications for a reverse mortgage:

· You must be a homeowner

· Your home must be structurally sound and in good repair

· You must be 62 years of age or older

· You must either own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan

· You must live in the home

· You must receive consumer information from an approved HECM counselor prior to obtaining the loan. The Housing Counseling Clearinghouse at (800) 569-4287 has names and phone numbers of HUD-approved counseling agencies and a list of FHA-approved lenders within your area.

4. Can I still qualify for a FHA HECM if my present loan is not a FHA insured loan?

Yes. The reverse mortgage is a new loan entirely – basically a refinance of your existing mortgage. Your old mortgage and all existing mortgages are paid off. The cash left over (equity) is paid out to the borrower. The borrower has several options regarding how he will receive the equity payout (discussed in question #11).

5. What types of homes are eligible for reverse mortgages?

The following types of homes are eligible:

· Single family homes

· 1-4 unit homes with one unit occupied by the borrower

· HUD approved condominiums that meet FHA requirements

· HUD approved manufactured (mobile) homes that meet FHA requirements

6. What's the difference between a reverse mortgage and a home equity loan?

With a second mortgage, traditional home equity loan, or home equity line of credit (HELOC) the borrower is required to pay the money back in monthly installments. These monthly payments begin almost immediately - within a few weeks after the borrower receives the payout. Also, the qualifications for these types of loans are stricter than those of a reverse mortgage.

With a reverse mortgage, the borrower makes no monthly installments. A reverse mortgage is easier to qualify for as well. Income is not considered regarding qualification – neither is credit rating.

The items that are considered in qualifying for a reverse mortgage are:

· Age – the borrower must be 62 or older.

· Current interest rates

· The appraised value of your home or FHA's mortgage limits for your area, whichever is less.

There are no monthly payments because the loan is not due as long as you are using your home as your principal residence. You must still pay your property taxes and home owner's insurance though.

You cannot be foreclosed because you have "missed too many payments." There are no mortgage payments to miss, however, you may be charged a monthly service fee.

7. What if I outlive the loan?

As long as one of the borrowers continues to live in the house and keeps the taxes and insurance paid, the loan will not come due. The loan is due when the house is no longer your primary residence. The amount you owe can never exceed more than the value of your home at the time you or your heirs sell it.

8. Will I still have an inheritable estate?

If you want the home to be passed down, a reversed mortgage may not be the right choice for you.

9. How much money can I borrow?

Generally, the more valuable your home is, and the older you are, and the lower the interest rate, the more you can borrow. You can use an online calculator to get an estimate of the amount you can borrow. The AARP website has one.

Just make sure you understand that some of your equity will be eaten up by lender fees (see question #12). This is why you must use caution and get good advice from a reputable counseling agency (see question #10).

10. Should I use an estate planning service to find a reverse mortgage?

Probably not. Estate planners provide information and counseling and help you find a lender. HUD provides the same information for free. HUD can also refer you to non-profit counseling agencies that are free or low cost. The Housing Counseling Clearinghouse can help you find an FHA lender. Why pay someone to do something that is easy to do yourself? To find a HUD-approved housing counseling agency, you can search on-line at http://www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm or call (800) 569-4287 toll-free.

11. Will the money from my reverse mortgage be paid to me in a lump sum?

* Tenure – This is an arrangement in which the borrower receives equal monthly payments as long as at least one borrower lives and occupies the home as a principal residence.

* Term – With this plan, the borrower receives equal monthly payments for a fixed period of time.

* Line of Credit – The borrower receives lump sums at whatever times and amounts the borrower chooses until the borrower has received full payout of his equity.

* Modified Tenure – The borrower receives monthly payments, but can also withdraw lump sums (when needed) for as long as the borrower remains in the home.

* Modified Term – The borrower receives monthly payments as well as lump sums (when needed) over a fixed period of time.

12. How much does a reverse mortgage cost?

Reversed mortgages are expensive. The start-up fees include insurance premiums, origination fees, and closing costs. These start-up fees will be equal to about 10% of your homes value. According to the AARP, if your home is worth $250,000, you can count on about $25,000 in start-up fees.

So, if you want to get $50,000 of your equity in cash, you will need to borrow $75,000. That is $50,000 for you and another $25,000 to cover the costs of the loan. In addition to the loan costs, you will also pay interest based on the life span of the loan and the interest rate.

With interest adding up and increasing your loan amount, you are gambling that the value of your house will appreciate enough over time to cover the amount that will come due when the house is sold.

13. What are the disadvantages of a reverse mortgage?

· The terms of a reversed mortgage can be confusing.

· Reversed mortgages are expensive - laden with fees to lenders, brokers, insurers, and other intermediaries.

· They include unpredictable charges based on future interest rates

· You will not get as much equity out of your house when you sell, or

· You may not have any equity at all when the house is sold – so there may be nothing for you or for your heirs

· Payments from reverse mortgages could affect your eligibility for some government assistance programs such as Supplemental Social Security Income, Medicaid, and food stamps. To find out, check with the provider of any benefits you are receiving or any provider you may receive payments from in the future

· Getting a reverse mortgage virtually guarantees that your home will one day be sold in order to pay the loan. If you want to keep your home in the family, a reverse mortgage is probably not for you.

14. Is a reverse mortgage right for me?

Reverse mortgages may be good options for:

* Seniors who plan to remain in their homes for several more years. It will take several years of appreciation on the home to recover the set-up costs.

* Those living on a fixed income and are having a hard time affording necessities like: utilities, prescription/medical expenses, groceries, etc.

* Those who have no cash reserves to cover a major expense - but remember you must have enough equity to cover the expense plus the loan fees.

* Those who are OK with the unpredictable future expenses associated with this type of loan.

* Those who are OK with the costly set-up fees for a reverse mortgage.

* Those who have urgent financial needs, who do not want to move, and whose only asset is their home equity.

* Those who are OK with knowing that the house will most likely have to be sold in order to pay off the debt – but the house will not be sold until the borrower no longer uses it as a primary residence.

Reverse mortgages are probably not good options for:

* Those who would use the money for luxuries or to purchase financial products like annuities, stock, or life insurance.

* Those who would use the money for a down payment on another loan.

* Those who wish to pass their home down to their family.

* Those who do not have substantial equity in their homes.

* Those who are making ends meet with their current income.

* Those who are not comfortable with the unpredictable financial elements associated with a reversed mortgage.

* Those who are troubled at the thought of sacrificing a large chunk of their equity to cover loan fees.

* Those who are receiving government "need based" benefits such as Medicaid, Supplemental Social Security Income, or food stamps.

15. What should I keep in mind when considering a reverse mortgage?

* If you are planning to use the funds from the reverse mortgage to pay a big expense, make sure that you have enough equity to cover the expense plus the set-up fees – reverse mortgages are expensive.

* A reversed mortgage is just one way to raise cash when you need it. Make sure you have explored all your options before applying for this type of loan. You may qualify for property tax credits, abatements, or inexpensive loans for home repairs. Check with your local agency on aging to see what programs are available.

* If you just need to get the equity out of your home, you may get more cash in your pocket by selling your house and moving to a less expensive place.

* Shop around. If you decide to get a reversed mortgage, get estimates (called Total Annual Loan Cost estimates) from several lenders. Credit unions and non-profit organizations often charge lower fees.

* Beware of predators. Mortgage scams are on the rise. Make sure you are working with a reputable lender.

* Reversed mortgages are not an option if you want cash for a down payment on another loan or if you want to purchase financial products such as annuities or life insurance.

* If you fall behind on paying your taxes and insurance, the lender may demand payment in full.

* The funds you receive from a reversed mortgage are tax-free.

Do's and Don'ts about reverse mortgages:

* Do educate yourself using reliable sources of information like HUD. Their web-site is at http://www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm or call them toll-free at 1-800-569-4287 for a referral to a HUD approved housing counselor in your area.

* Do find impartial help at the web-site/number above.

* Don't pay an application fee for a reversed mortgage until you have received financial counseling.

* Do be patient with the counseling process. A good counselor will have several discussions with you and will devote hours to discovering your unique needs and researching all your financial options. You want to make sure you have been fully informed on the pros and cons of reversed mortgages before you apply.

* Do involve a trusted third party – maybe a family attorney – to review your loan documents. Your housing counselor may not be trained to review legal documents.

* Do trust your instincts and the wisdom of your years. If you have big worries about it, a reversed mortgage may not be the right option for you.

* Don't get a reverse mortgage if you have other assets (stocks, savings accounts, IRA's, jewelry, etc.) that you can liquidate to raise cash.

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