By Debbie Hall, Director, Senior Financial Care
Reverse Mortgages are becoming more popular in the United States as more Americans retire and decide to “age in place”, but you should be cautious before spending down the equity in your home.
In fact, it never hurts to be cautious about any financial product someone is trying to sell you. Since for many seniors their home is their largest asset, it is important to know more about Reverse Mortgages in order to decide if one is right for you.
If you have other assets or you have a mortgage and are able to make payments on it, this product may not be a good idea. However, a Reverse Mortgage can be a valuable financial tool when an eligible senior has home equity but not a lot of monthly cash flow.
Reverse mortgage loans are a type of home loan that is available only to people over 62 years of age. It allows a homeowner to convert a portion of the equity in his or her home into cash. Homeowners with sizeable equity in their home can borrow against the equity and use the loan proceeds for any purpose. Currently, homeowners are not subject to any specific income or credit requirements to qualify for a reverse mortgage loan because the loan is secured by the equity in their home. Unlike conventional mortgages, reverse mortgage borrowers do not make monthly payments to repay the loan.
The loan amount a borrower can get depends on a number of factors, including the appraised value of the home, the amount of equity in the home, the borrower’s age and current interest rates. Seniors who take out reverse mortgages retain ownership of their home; lenders do not want your house; they want repayment.
Once you receive the money, there are virtually no restrictions on the way in which it can be used. In general, the loan should not be used for frivolous purchases but rather for necessary expenses. Like all mortgages, there are costs involved and Reverse Mortgage loans include several fees, including origination and servicing fees, closing costs, mortgage insurance, and interest.
Reverse mortgage loans must be repaid when the last surviving borrower dies, sells the home or permanently moves out of the home. Typically, this means that neither you nor any other co-borrower has lived in the home for one continuous year. However, Reverse Mortgage lenders can require repayment at any time if you fail to pay your property taxes, fail to maintain and repair your home, or fail to keep your home insured.
If you wonder how your heirs will be affected if you take out a reverse mortgage loan, it is important to know that heirs are not burdened with any debt. When you sell your home or no longer use it for your primary residence, you or your estate must repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. You or your heirs can either pay off the loan with existing funds or sell the house in order to satisfy the loan. The remaining equity in your home, if any, belongs to you or to your heirs.
Interested borrowers are required to receive counseling from a HUD-approved Reverse Mortgage counselor prior to obtaining a Reverse Mortgage loan. Upon completion of the counseling you should be more comfortable in making an independent, informed decision of whether this product will meet your needs.