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Get all the facts before shifting into a reverse mortgage
Author: Jean Mitchell - Reverse Mortgage Get all the facts before shifting into a reverse mortgage
By Jean Mitchell
You're in a dilemma: Your gazebo on the patio was smashed by the recent high winds, but you don't want to borrow from the bank or use your credit card to finance the repairs. Then you remember hearing about reverse mortgages, which can enable homeowners who are 62 or older to convert part of the equity in their homes into cash.
You are told that you need not sell your home or rack up additional monthly bills. They say the money can be used to make home improvements, repairs, finance health care expenses, beef up retirement income or meet myriad other monetary expenses.
Usually, you don't have to repay the loan as long as you live in your home. Reverse mortgages can help homeowners who are house-rich but cash-poor to remain in their homes and still take care of financial obligations. But go cautiously into a reverse mortgage.
As Kathleen Delaney, of the Nevada Attorney General's Office, said, "There are infinite varieties of reverse mortgages, as there are of any kind of loan. But there are three basic types of reverse mortgages."
Single purpose. These loans are generally offered by some state and local government agencies and nonprofit organizations. They are generally low cost but are not available everywhere. As the name implies, these loans can be used for one purpose only specified by the government or nonprofit lender, such as paying for home improvements. Usually, you can qualify if you are in a low or moderate income bracket.
Federally insured. Backed by the U.S. Department of Housing and Urban Development, these loans are called Home Equity Home Conversion Mortgages, or HECMs.
Proprietary. This type of loan is private money backed by the companies you are borrowing from. In general, HECMs and proprietary reverse mortgages are apt to be more costly than other home loans. Delaney says "Up front costs can be high, thus making the instrument more expensive if you live in your home for just a short while. Both these forms of reverse mortgages are widely available, have no income or medical requirements and can be used for any purpose."
The Federal Trade Commission, in a Facts for Consumers news release, describes certain aspects of reverse mortgages that you should be aware of:
These loans advances are not taxable, and generally do not affect Social Security or Medicare benefits.
The amount you owe generally grows over time. The interest charged on the outstanding balance is added to the amount you owe each month. In other words, your debt rises with time because you are receiving loan funds on which interest is accruing.
Be aware that reverse mortgages can absorb some or all of the equity in your home, leaving reduced assets for you and your heirs. Be sure the agreement contains a "non-recourse" clause, found in most reverse mortgages. It prevents either you or your estate from owing more than the home's value when the loan is repaid.
An important aspect: Because you retain title, you are still responsible for property taxes, insurance, utilities, fuel, maintenance and other expenses. For instance, if you don't pay property taxes or let your homeowner's insurance lapse, you risk making the loan due and payable immediately.
Jean Mitchell is an active Dayton senior who has revived her writing career with this column.
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