Reverse mortgages have been used by older Americans to pay for medical treatment, buy long-term care insurance, finance home improvements, or supplement income. These mortgages allow them to convert the equity in their homes to cash while retaining their home ownership. Rather than making monthly payments to a lender, under a reverse mortgage the consumer gets money from the lender and does not have to repay it for as long as he lives in his home. In exchange, the lender will hold onto some, most, or all of the consumer's home's equity.
Who Should Consider a Reverse Mortgage?
"House-rich-but-cash-poor" residents may want to consider reverse mortgages. These mortgages allow them to stay in their houses and maintain financial stability. However, such mortgages are usually more expensive than other loans. There have also been cases of abuse by some lenders.
What Types of Reverse Mortgages Are There?
There are different types of reverse mortgages:
- Single-purpose reverse mortgages : State or local government agencies may offer these mortgages.
- Home Equity Conversion Mortgage (HECM) : The Department of Housing and Urban Development (HUD) administers this federally insured mortgage.
- Proprietary reverse mortgages : Banks, mortgage companies, and other private lenders offer these types of mortgages.
To qualify, you must be 62 or older. You must also have paid off all or most of your mortgage. You are generally not required to disclose your income or provide any medical tests or histories. You may have to undergo some sort of mortgage counseling. The amount that can be borrowed is calculated based on your age, your house's equity, your house's value, and the interest rate.
What Should I Look Out For?
Although a reverse mortgage may be tempting, you should be aware that:
- Reverse mortgages are usually more expensive than traditional loans.
- The interest on reverse mortgages is not deductible until you pay off the loan in part or in full.
- The equity in your home may be partially or fully used up by a reverse mortgage.
- As a homeowner, you are still responsible for taxes, fuel, insurance, maintenance, and other expenses.
- You can be charged origination fees, closing costs, or even servicing fees by lenders.
If you do decide to shop around for a reverse mortgage, remember that the Truth in Lending Act requires lenders to disclose certain terms and information before you sign a loan.
Do I Need a Lawyer Experienced with Reverse Mortgages?
A real estate lawyer can help you decide whether a reverse mortgage is really necessary or attractive in your situation. If you suspect that your lender is violating the law, you can file a complaint with your lender, the state Attorney General's office, or the Federal Trade Commission (FTC).