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Understanding the True Cost of Reverse Mortgages

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If you’re 62 or older and need money, you may be thinking about a reverse mortgage. A reverse mortgage allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.

In a “regular” mortgage, you make monthly payments to the lender. In a “reverse” mortgage, you receive money from the lender. Generally, you don’t have to pay it back for as long as you live in your home. The loan is repaid when you die, sell your home, or when you no longer live in your home. The proceeds of a reverse mortgage generally are tax-free. Many reverse mortgages have no income restrictions.


Types of reverse mortgages

There are three types of reverse mortgages:

  • Single-purpose reverse mortgages are the least expensive. These are offered by some state and local government agencies and nonprofit organizations. They can be used for only one purpose. That purpose is decided by the lender. For example, the lender might say the loan may be used only to pay for home repairs or property taxes.

  • Federally-insured reverse mortgages are known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD). HECM loans have no income or medical requirements, and can be used for any purpose.

  • Proprietary reverse mortgages are private loans that are backed by the companies that develop them

The last two, Home Equity Conversion Mortgages and Proprietary reverse mortgages, may be more expensive and upfront costs can be high. That may hurt you if you plan to stay in your home for just a short time or borrow a small amount.


How much can I borrow?

How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors:

  • your age

  • the type of reverse mortgage you select

  • your home’s appraised value

  • current interest rates

In general, you can get more money the older you are, the more equity you have in your home, and the less you owe on it.

Reverse mortgage loan advances are not taxable, and generally don’t affect your Social Security or Medicare benefits. You retain the title to your home and you don’t have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence.

If you’re considering a reverse mortgage, be aware that:

  • There are upfront and ongoing fees. Lenders generally charge an origination fee, a mortgage insurance premium (for federally-insured HECMs), and other closing costs. Lenders also may charge servicing fees during the term of the mortgage. The lender sometimes sets these fees and costs. Your upfront costs can be lowered if you borrow a smaller amount through a reverse mortgage product called a "HECM Saver."

  • The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases as the loan funds are advanced to you and interest on the loan accrues.

  • Most reverse mortgages have variable rates. Although some have fixed rates, most have variable rates that are tied to a financial index. They are likely to change with market conditions.

  • Reverse mortgages can use up all or some of the equity in your home. This leaves fewer assets for you and your heirs. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home. But if you or your heirs ever decide you want to keep the home, you usually must repay the loan in full. That could be more than the actual value of the home.

  • You are still responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. Because you retain title to your home, you are responsible for these costs. If you don’t stay current with these items, your loan may become due and payable.

  • Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Content Last Modified on 2/25/2013 11:04:56 AM