What is a Reverse Mortgage?

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The concept of a reverse mortgage is relatively new and has attracted considerable attention. Simply stated, a reverse mortgage is a loan that is available to homeowners, age 62 or older. The loan enables them to covert part of the equity in their home into cash.  With a reverse mortgage, the loan does not have to be repaid, and the interest rate on the loan is considerably less than commercial rates. A homeowner can draw a monthly check that will be sent until both owners, in the case of a married couple have vacated the home and have, for example, been transferred to a nursing home with no expectation of returning to their home. At that the home will revert to the lender.

A homeowner can also establish a line of credit based on the value of the home and withdraw funds as needed. Again it is not required that you repay the withdrawals. The homeowner also has the option of repaying the money, such as using the insurance benefits from a deceased spouse. At that point, the surviving homeowner would be free to continue living in the home, sell it, or turn over to a child. As long as you are receiving monthly payments from the reverse mortgage or maintaining the line of credit, the owner is required to remain current on property taxes, homeowner’s insurance, and condominium fees (if the person lives in a condo).

There are some procedures and paperwork involved in securing a reverse mortgage. The steps include:

–Finding a lender. This company will help with the actual reverse mortgage, answer questions about repayment options, explain residency requirements and guide you through the steps.
–Counseling session: This is handled by an independent company that will discuss the issue with both spouses and explain exactly what is going to take place when they die, regarding inheritance issues, or when both are no longer able to live in the home for health reasons.
–Appraisal: The value of your home will have to be appraised, just as it would be for any mortgage. The value set for the home will be approximately half of the value.
–Payment options: The owners of the home will have two options. They can receive a monthly check that will continue until they leave the home permanently. In this case, the amount received by the owners could exceed the value of the appraisal. That makes no difference, the payments will be sent as long as the home is occupied. However, they will remain static, in that they will not increase.
–Second payment option: The homeowner can set up a line of credit at a very low interest rate. This would make larger sums available more quickly. The line-of credit would be divided into two parts. One portion would be available immediately. The other portion would be accessible a year later.
–Ability to retain the home: With the line of credit, a homeowner could make monthly payments or arrange for a total repayment when they leave the home or die, allowing the facility to be inherited by heirs. However, there is no requirement to do so. If the loan is not repaid, the ownership reverts to the lender.
–You are not bound to living in your home on a continuous basis: Vacations are allowed, and hospital stays will not result in any penalty. You are permitted to live out of your home for a total of 12 months. If you find yourself in an extended-care situation such as a nursing home or on an extended-out-of-town work situation, you must approach the lender and discuss a possible extension.

You are not required to purchase other financial products such as annuities, long-term care insurance or other options as a condition for getting a reverse mortgage. If you are approached in a manner that requires such “mandatory” purchases, the owners should contact the Department of Housing and Urban Development or the National Reverse Mortgage Lender’s Association.

It is important to remember that when you have a reverse mortgage, you are still responsible for maintaining the house, paying all property taxes, and paying for homeowner’s insurance.
Reverse mortgages are gaining in popularity, but they are not for everyone. Circumstances such as the remaining balance on the existing mortgage, how much has been set aside for normal living expenses, monthly and annual income and the cost of securing a reverse mortgage all have to be considered?

There are numerous articles on the Internet published by US News and World Report and AARP showing problems with accepting a reverse mortgage.

Therefore, there are some common sense tips to keep in mind when considering a reverse mortgage.

–if you need the reverse mortgage to meet monthly living expenses, it may not be the best approach for you.
–if you are using the reverse mortgage to build up a cushion or to pay off the loan, the reverse mortgage may not be your best choice. IF you have questions, keep asking until you have all the answers that you need.

The reverse mortgage does incur interest. If you die or move to a nursing-home facility, you have the option of paying back what you have received plus interest and then leaving the home to an heir or heirs.

However, you can do nothing and the bank or lending institution will take possession of the home and sell it to recover what it has paid out to you over the years. Thus, it is important to talk to your counselor and insist that you get firm answer regarding what the payoff would be if one spouse lived to age 80. You can then decide if other assets you are leaving to loved ones are sufficient. If that is the case, it may be unnecessary to expend any money in repaying the reverse mortgage. There are numerous sites on the Internet with pro and con articles and other articles that just warn of possible dangers. Regardless of your decision, it is necessary to do your research, before making any decisions.

Photo by Jeff J Mitchell/Getty Images

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Written by Brian McCaw

Brian is a lover of all things real estate including photography, architecture, news, and so much more.