The loan is repaid when the
homeowner dies or moves. Any remaining equity in the home (after the
repayment of the loan) goes to the former homeowner or his estate.
Obviously, to qualify for a reverse mortgage, you must own your home and you
will continue to be responsible for property taxes and general upkeep. The
amount you are eligible to borrow is generally based on your age, the interest
rate and the amount of equity in your home and it must be repaid, with interest,
when you sell or move from the home, die or reach the end of the loan term
(depending upon what type of plan you choose).
The lender will not take
title to your home and you are entitled to live in your home even after you have
exhausted your equity. Some programs even guarantee monthly payments for
Since you are merely receiving a loan each month, the proceeds are nontaxable
and they will not affect your Social Security or Medicare benefits.
Furthermore, the interest that is accruing on your mortgage is not deductible
until you pay off the debt.
The amount you may borrow will vary based on your age. The loans may go
as high as 50 to 75% of the home's fair market value and are based on life
expectancy tables, so you are generally allowed to borrow more if you are
Types Of Reverse Mortgages
There are three basic types of reverse mortgages: FHA insured, lender
insured and uninsured. Using the FHA insured plan, you can take monthly
loan advances, a line of credit or monthly loan advances plus a line of credit
for as long as you live in the home. There will be closing costs and a
mortgage insurance premium you will have to pay.
An FHA insured reverse mortgage provides you with a guarantee that loan
advances will continue even if the lender defaults. However, with an FHA
insured mortgage, your loan costs may be higher and your loan advances may be
smaller than with other plans.
A lender insured reverse mortgage is similar to an FHA insured plan, but the
loan advances may be larger and you may also be allowed to mortgage less than
the full value of your home which will preserve some equity for you or your
estate. Some plans also include an annuity that will continue to make
monthly payments to you even if you sell your home or move.
Uninsured plans provide monthly advances for a fixed term only. When
the loan advances expire, the total loan balance becomes due. No mortgage
insurance premium is required with an uninsured plan. These types of plans
are generally used when someone has short-term cash needs.
Disadvantages Of A Reverse Mortgage
Obviously, the biggest downside to a reverse mortgage
is that it uses up possibly your most valuable asset - the equity in your
home. That means there will be less for you to leave your
heirs. Reverse mortgages can also have high up-front costs and
monthly insurance premiums and since the unpaid interest is added to your
loan balance each month, the total interest you owe will increase
significantly over time.
You may also feel "locked into" your
home. If a sibling or other relative becomes ill and you want to
move to another city to be closer, your reverse mortgage will typically
have to be terminated and repaid. Reverse mortgages also will often
carry adjustable interest rates.
If the public index rises
significantly in the future, you may find your equity being used up at a
much faster pace than you anticipated. Fixed rate reverse mortgages
are available, but will usually involve some trade-offs you may not be
willing to make.
Please give us a call if you are considering a
reverse mortgage. As you can see, there are many options to consider
and there are other alternatives not mentioned in this article that we can
discuss. We can help you review your present situation and come up
with a plan that should be right for you.