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money to pay for medical treatment, finance a home improvement,
buy long-term care insurance, or supplement their income, many
older Americans are turning to "reverse mortgages."
They allow older consumers to convert the equity in their homes
to cash while retaining home ownership.
With a "regular"
mortgage, you make monthly payments to the lender. But with a
reverse mortgage, you receive money from the lender and generally
do not have to repay it for as long as you live in your home.
In return, the lender holds some — if not most or all —
of your home's equity.
in the late 1980s, reverse mortgages can help homeowners who are
"house-rich-but-cash-poor" remain in their homes and
still meet their financial obligations. The proceeds of the loan
are tax-free, there are no minimum income requirements, and for
most reverse mortgages, the money can be used for any purpose.
mortgages also tend to be more costly than other loans, and there
have been cases of abuse by unscrupulous lenders.
considering a reverse mortgage, it's important to understand how
the loans work and what your rights and responsibilities are.
There are several types of reverse mortgages:
To qualify for
a reverse mortgage, you must be at least 62 and have paid off all
or most of your home mortgage. Income is generally not a factor,
and no medical tests or medical histories are required. If you seek
an HECM, you also must undergo free mortgage counseling from an
independent government-approved "housing agency." Financial
institutions offering proprietary reverse mortgages may require
similar counseling or homeowner education.
- the federally
insured Home Equity Conversion Mortgage (HECM), administered
by the Department of Housing and Urban Development (HUD)
reverse mortgages, usually offered by state or local government
agencies for a specific reason
reverse mortgages, offered by banks, mortgage companies, and
other private lenders and backed by the companies that develop
amount you can borrow depends on your age, the equity in your
home, the value of your home, and the interest rate. If it's an
HECM, federal law limits the maximum amount that can be paid out.
You can be
paid in a lump sum, in monthly advances, through a line of credit,
or a combination of all three.
Reverse mortgages offer special appeal to older adults because
the loan advances, which are not taxable, generally do not affect
Social Security or Medicare benefits. Depending on the plan, reverse
mortgages generally allow homeowners to retain title to their
homes until they permanently move, sell their home, die, or reach
the end of a pre-selected loan term. Generally, a move is considered
permanent when the homeowner has not lived in the home for 12
consecutive months. So, for example, a person could live in a
nursing home or other medical facility for up to 12 months before
the reverse mortgage would be due.
a Good Deal
mortgages tend to be more costly than traditional loans because
they are rising-debt loans. The interest is added to the principal
loan balance each month. So, the total amount of interest owed
increases significantly with time as the interest compounds.
mortgages use up all or some of the equity in a home. That leaves
fewer assets for the homeowner and his or her heirs.
generally charge origination fees and closing costs; some charge
servicing fees. How much is up to the lender.
on reverse mortgages is not deductible on income tax returns
until the loan is paid off in part or whole.
homeowners retain title to their home, they remain responsible
for taxes, insurance, fuel, maintenance, and other housing expenses.
If you decide to consider a reverse mortgage, shop around and compare
terms. Look at the:
Under the federal
Truth in Lending Act, lenders must disclose these terms and other
information before you sign the loan. On plans with adjustable rates,
they must provide specific information about the variable rate feature.
On plans with credit lines, they must inform the applicant about
appraisal or credit report charges, attorney's fees, or other costs
associated with opening and using the account. Be sure you understand
these terms and costs.
percentage rate (APR), which is the yearly cost of credit.
- type of
interest rate. Some plans provide for fixed rate interest; others
involve adjustable rates that change over the loan term based
on market conditions.
of points (fees paid to the lender for the loan) and other closing
costs. Some lenders may charge steep costs, which your lender
may offer to finance. However, if you agree to this, you'll
take out fewer proceeds from the loan or you'll borrow an extra
amount, which will be added to your loan balance and you'll
owe more interest at the end of the loan.
- total amount
loan cost (TALC) rates. The TALC rate is the projected annual
average cost of a reverse mortgage, including all itemized costs.
It shows what the single all-inclusive interest rate would be
if the lender could charge only interest and no fees or other
terms, including acceleration clauses. They state when the lender
can declare the entire loan due immediately.
mortgages come with different provisions. For example, with some
reverse mortgages, the lender may take a share of equity appreciation.
This could create issues for the homeowner or heirs, particularly
if the value of the home rises unexpectedly during the loan. Carefully
read any provision of the contract about shared appreciation.
Also, be cautious
about reverse mortgages offered by door-to-door and other home
solicitation lenders. There have been various problems with these
types of lenders. Some of the problems have involved steep points
and loans that primarily seek to take the owner's equity.
have at least three business days after signing a reverse mortgage
contract to cancel it. The cancellation must be in writing.
If you suspect that a lender is violating the law, register your
concerns with the lender or loan servicer. You also may wish to
file a complaint with:
- your state
Attorney General's office or state banking regulatory agency
- the Federal
Trade Commission (FTC). File a complaint online at www.ftc.gov
or call toll-free 1-877-FTC-HELP (1-877-382-4357).
Is a reverse mortgage right for you? Before you decide, consider
all your options; you may qualify for other less costly credit
plans. Information to help you decide is available from:
601 E Street, NW
Washington, DC 20049
National Center for Home Equity Conversion
360 N. Robert Street, #403
St. Paul, MN 55101
Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
HUD also can
refer you to a HUD-approved reverse mortgage counselor. Call HUD
toll-free at 1-888-466-3487 or 1-800-569-4287.
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580