Reverse Mortgages: Proceed with Care
Whether seeking 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.
Introduced 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.
But, reverse mortgages also tend to
be more costly than other loans, and there have been
cases of abuse by unscrupulous lenders.
If you're considering a reverse mortgage,
it's important to understand how the loans work and
what your rights and responsibilities are.
The Basics
There are several types of reverse
mortgages:
- the federally insured Home
Equity Conversion Mortgage (HECM), administered by
the Department of Housing and Urban Development (HUD)
- single-purpose reverse mortgages,
usually offered by state or local government agencies
for a specific reason
- proprietary reverse mortgages,
offered by banks, mortgage companies, and other private
lenders and backed by the companies that develop them.
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 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.
Common Features
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.
However, be aware that:
- Reverse 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.
- Reverse mortgages use up all or some of the equity
in a home. That leaves fewer assets for the homeowner
and his or her heirs.
- Lenders generally charge origination fees and closing
costs; some charge servicing fees. How much is up
to the lender.
- Interest on reverse mortgages is not deductible
on income tax returns until the loan is paid off in
part or whole.
- Because homeowners retain title to their home,
they remain responsible for taxes, insurance, fuel,
maintenance, and other housing expenses.
Getting a
Good Deal
If you decide to consider a reverse mortgage, shop around
and compare terms. Look at the:
- annual 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.
- number 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 costs.
- payment terms, including acceleration clauses.
They state when the lender can declare the entire
loan due immediately.
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.
Reverse 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.
You generally have at least three
business days after signing a reverse mortgage contract
to cancel it. The cancellation must be in writing.
Reporting
Possible Fraud
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).
Consumer
Advice
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:
AARP
601 E Street, NW
Washington, DC 20049
1-800-424-3410
www.aarp.org/revmort
The National
Center for Home Equity Conversion
360 N. Robert Street, #403
St. Paul, MN 55101
1-651-222-6775
www.reverse.org
U.S. Department
of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
1-888-466-3487
www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm
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.
Federal
Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
www.ftc.gov
1-877-FTC-HELP (1-877-382-4357)
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