Into Reverse with Caution:
Details about Reverse Mortgages

By Dianne Molvig

In the past, you handed over a monthly payment to your mortgage lender. Now there’s a mortgage product, aptly named, that reverses the payment process. In a reverse mortgage, the lender pays you an amount of money that depends on your age, your home’s value, and the loan’s interest rate. To qualify for a reverse mortgage, you must be at least 62 years old, have equity in your home, and your home must be your principal residence. If more than one person owns the home, the youngest owner must be at least 62.

Under this plan, you make no monthly loan payments as long as you continue to live in your home. Ultimately, the loan—including the amount you borrowed, plus interest and any loan fees you rolled into the loan—will be paid off when you or your heirs sell your house.

Who could benefit?

Borrowers perhaps best suited to a reverse mortgage are those who are seeking financial security. They have plenty of money in their house, but they can’t afford a home equity loan because they’d have to make monthly payments. They’re on a fixed income. Being house-rich and cash-poor, these borrowers often face difficulties in meeting ordinary living expenses, medical bills, home repair costs, and property taxes. Selling their home seems the only way to make ends meet. A reverse mortgage offers another option.

However, there are tradeoffs and pitfalls. Opting for a reverse mortgage is a complex, often difficult decision.

Things to Consider

Your house may be the biggest asset you have to pass on to your heirs. But in a reverse mortgage, the payments you receive come from your home’s equity. Your heirs will get less of that asset, based on how much you end up borrowing against your home equity. Only you can decide how important this issue is.

Keep in mind, too, that reverse mortgages come with sizable fees that may be as much as 5% to 6% of the home’s value. You can roll these fees into the loan. Still, that increases the amount you’ll borrow and adds to the amount of interest you’ll pay. Because of the high fees, reverse mortgages aren’t a good option if you think you’ll be selling your home in the next couple of years, advises Bronwyn Belling, reverse mortgage specialist with AARP, Washington, D.C. “You want to be sure you’re going to stay in the house,” she says, “so you can amortize those fees over a longer period of time. Then the effective cost to you is less.” “Also,” Belling adds, “it’s better to consider this type of loan when you’re older, rather than younger.” You can borrow a larger percentage of your home’s value based on your age, or the age of the youngest borrower among the home’s owners.

Still other factors affect how well this loan will work for you. Typically, reverse mortgages are adjustable-rate loans, with a lifetime cap. Interest rates can climb. Your home’s value can change, as can your health and your ability to continue living in your home. All of these, Belling points out, “ultimately drive what the real costs of a reverse mortgage are to you in the end.” You’ll also need to find out whether receiving this money will affect your Medicaid or Supplemental Security Income benefits.

Much to learn

Which type of reverse mortgage is right for you? In the U.S., the Home Equity Conversion Mortgage (HECM), which is federally insured, is the most common. More than 95% of reverse mortgages are HECMs, according to Belling. Another type is Fannie Mae’s Home Keeper®.

Other key decisions include: Do you want your money in a lump sum, as monthly payments, as a credit line to draw on as needed, or some combination of these?

All U.S. prospective borrowers who wish to apply for a HECM must talk to an independent, objective housing counselor who works for an agency (some charge a fee) approved by the U.S. Department of Housing and Urban Development (HUD).

Belling concludes, “For some people, a reverse mortgage is not a good idea. For others, it’s a godsend.” ■

Home & Family Finance Resource Center
http://hffo.cuna.org/331/article/930/html