Reverse Mortgages

What is a Reverse Mortgage and can it help me?  If your loved one owns his or her home, you might want to consider a reverse mortgage as an option to pay for care.

If your loved one is age 62 or older, and owns his or her home, a reverse mortgage (RM) can help increase his or her monthly income. However, because a home is such a valuable asset, you and your loved one should consult an attorney or financial advisor before applying for an RM. Knowing your loved one’s rights and responsibilities as a borrower may help to minimize financial risks and avoid any threat of foreclosure or loss of your loved one’s home.

Reverse Mortgage Fast Facts

  • A reverse mortgage is a type of home equity loan that allows your loved one to convert some of the equity in his or her home into cash while retaining home ownership.
  • RMs works much like traditional mortgages, only in reverse. Rather than making a payment to the lender each month, the lender pays your loved one.
  • To qualify for an RM, your loved one must own his or her home.
  • Depending on the plan your loved one selects, his or her RM becomes due with interest when your loved one moves, sells the home, dies, or reaches the end of the pre-selected loan term.
  • The cash from a reverse mortgage can be spent any way your loved one wishes.

Types Of Reverse Mortgages

Here is 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. The main difference between these options is the way money is paid to your loved one.

FHA-Insured

This plan offers several RM payment options. The homeowner may receive monthly loan advances for a fixed term or for as long as he or she lives in the home. The homeowner may also receive a line of credit, or monthly loan advances plus a line of credit. (With the line of credit option, your loved one may draw amounts as needed over time.) FHA-Insured RMs don’t have to be repaid as long as your loved one lives in his or her home. Closing costs, a mortgage insurance premium, and a monthly servicing fee may be required. Interest is charged at an adjustable rate on the 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 your loved one by guaranteeing that loan advances will continue even 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 your loved one lives in his or her 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 your loved one to mortgage less than the full value of his or her home, thus preserving home equity for later use. However, these loans may involve greater loan costs than FHA-insured, or uninsured loans. Higher costs mean that the loan balance grows faster, leaving your loved one with less equity over time.

Some lender-insured plans include an annuity that continues making monthly payments to you even if your loved one sells his or her home and moves. 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 loved one’s eligibility for Supplemental Security Income and Medicaid. These “reverse annuity mortgages” may also include additional charges based on increases in the value of your loved one’s home during the term of the loan.
 
Uninsured

Uninsured RMs are 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 your loved one selects when he or she takes out the loan. The loan balance becomes due when the loan advances stop. Interest is usually set at a fixed interest rate and no mortgage-insurance premium is required.

If your loved one considers an uninsured RM, he or she must think about the amount of money needed monthly; how many years he or she may need the money; how he or she will repay the loan when it comes due; and how much remaining equity he or she will need after paying off the loan.

If your loved one has short-term but substantial cash needs, the uninsured RM can provide a greater monthly advance than the other plans. However, because the loan must be paid back by a specific date, it is important for your loved one to have a source of repayment. If he or she is unable to repay the loan, your loved one may have to sell the home and move.

The United States Department of Housing and Urban Development offers a reverse mortgage program. Counseling is available—sometimes at no cost—and referrals to HUD-approved lenders are also available.

Thinking About Reverse Mortgages

  • 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 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 loved one’s lender may permit him or her to finance these costs, but doing so will simply add these costs to the loan amount.
  • RMs use up some or all of the equity in a home, leaving your loved one with fewer assets for the future.
  • Your loved one may be able to request a loan advance at closing that is substantially larger than the rest of his or her payments.
  • Your loved one’s legal obligation to pay back the loan is limited by the value of his or her home at the time the loan is repaid. This could include increases in the value (appreciation) of the home after the loan begins.
  • RM loan advances are nontaxable. Further, they do not affect Social Security or Medicare benefits. If your loved one receives Supplemental Security Income, RM advances won’t affect his or her benefits as long as he or she spends the advances within the month they are received. This is also true in most states for Medicaid benefits. For more information, check with a benefits specialist at your loved one’s local Area Agency on Aging.
  • 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 your loved one pays off all or part of his or her total RM debt.

© Copyright FamilyCare America, Inc. All Rights Reserved.

Adapted from Facts For Consumers developed by the United States Federal Trade Commission.

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