MortgagesCashing In On Home Ownership
consumers age 62 or older are "house-rich and cash-poor" their mortgages
are paid off, but they are living on fixed or limited incomes. A "reverse
mortgage" may allow some consumers to take advantage of their home as a valuable
asset and convert it to a source of income without losing home ownership.
How Reverse Mortgages Work
A reverse mortgage is a loan: where the lender pays youin
a lump sum, a monthly advance, a line of credit, or a combination of all threewhile
you continue to live in your home. To qualify for a reverse mortgage, you must
own your home. The amount you are eligible to borrow generally is based on your age, the
equity in your home, and the interest rate the lender is charging. Funds you receive from
a reverse mortgage may be used for any purpose.
With a reverse mortgage, you retain title to your home. You are
responsible for maintaining your home and paying all real estate taxes. Depending on the
plan you select, your reverse mortgage becomes due with interest when you move, sell your
home, reach the end of a pre-selected loan period, or die. When you die, the lender does
not take title to your home, but your heirs must pay off the loan. Usually, the debt is
repaid by selling the home or refinancing the property.
Facts to Consider about Reverse
- Reverse mortgages are rising-debt loans. The interest is added to the
principal loan balance each month, because it is not paid on a current basis. The amount
you owe increases over time as the interest compounds. Some reverse mortgages have
fixed-rate interest; others have adjustable rates that can change over the lifetime of the
- Reverse mortgages use up some or all the equity in your home, leaving
fewer assets for you and your heirs.
- The three types of reverse mortgagesFHA-insured, lender-insured,
and uninsuredvary according to their costs and terms. Check the features of each to
select the type that is best-suited for your needs. Before considering any reverse
mortgage, consult with family members, your attorney, or financial advisor.
- Reverse mortgages typically charge loan-origination fees and closing
costs. Insured plans charge insurance premiums; some plans have mortgage servicing fees.
You may be able to finance these costs if you want to avoid paying them in cash. But, if
you finance the costs, they will be added to your loan amount and you will pay interest on
- Your legal obligation to repay the loan is limited by the value of your
home at the time the loan is repaid. This could include any appreciation in the value of
your home after your loan begins.
- There are various reverse mortgage plans offered today. Consult your
attorney or financial advisor about the tax consequences of the particular plan you are
Reverse Mortgage Safeguards
The federal Truth in Lending Act (TILA) is one of the best
protections you have with a reverse mortgage. TILA requires lenders to disclose the costs
and terms of reverse mortgages. This includes the Annual Percentage Rate (APR) and payment
terms. If you choose a credit line as your loan advance, lenders also must tell you of
charges related to opening and using your credit account.
For more information about reverse
mortgages, contact the Home Equity Information Center of the American Association of Retired Persons (AARP), 601 E
Street, NW, Washington, DC 20049.
The FTC works for the consumer to
prevent fraudulent, deceptive and unfair business practices in the
marketplace and to provide information to help consumers spot, stop and
avoid them. To file a
complaint or to get free information
on consumer issues, visit
call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The
FTC enters Internet, telemarketing, identity theft and other fraud-related
Consumer Sentinel, a
secure, online database available to hundreds of civil and criminal law
enforcement agencies in the U.S. and abroad.
FEDERAL TRADE COMMISSION
FOR THE CONSUMER