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 you
-in a lump sum, a monthly advance,
a line of credit, or a combination of all three-while
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
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 Mortgages
- 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 loan.
- 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 mortgages-FHA-insured,
lender-insured, and uninsured -vary 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 them.
- 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 considering.
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.
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