The Fundamentals of Reverse Mortgages

If you love your family home, perhaps the last thing you want to do when you retire is sell it and move away. But staying put on a fixed income may not be easy. A reverse mortgage is sometimes seen as a solution to this problem. While these types of mortgages are valuable resources, they have pros and cons that must be considered. Make sure you educate yourself before making such an important financial decision.

You can begin by reviewing this basic information:

• Definition of a Reverse Mortgage
• Some Pros and Cons of a Reverse Mortgage
• A Typical Reverse Mortgage
• The Different Types of Reverse Mortgages

Definition of a Reverse Mortgage

"But, I don't even know what a reverse mortgage is!"

Don't worry. This is a common sentiment among retirees. Basically, a reverse mortgage is a type of home loan that lets an older homeowner convert a portion of their home's equity into cash. In other words, the equity you built up over years of home mortgage payments is paid directly to you. These types of loans are usually paid back from the proceeds of your home's sale after you die or when you decide to sell or move away. To qualify for a reverse mortgage you must own your home and be at least 62 years old. There are special fees and charges associated with these loans.

Some Pros and Cons of a Reverse Mortgage

Pros:

• You can convert home equity into cash.
• You can acquire additional funds without selling your house.
• You typically do not have to pay anything back until you die, sell your home, or permanently move out of your home.
• The form of the loan payout is flexible. You can get your proceeds a lump sum, monthly payments, line of credit, or a combination of any of these options.

Cons:

• You generally must pay closing costs that are significantly higher than closing costs associated with other types of home loans.
• The proceeds you make from a reverse loan count as an asset and could prevent you from qualifying for Medicaid.
• You are charged interest on the outstanding balance of your loan, which means your total debt increases over time.

A Typical Reverse Mortgage*

A Reverse Mortgage by the Numbers

Value of Home: $300,000

Typical Fees and Charges: $30,000 (not including interest)

*Source: AARP Public Policy Institute

The Different Types of Reverse Mortgages*

Single-Purpose Reverse Mortgages:

Mortgages offered by some state and local government agencies and nonprofit organizations.

• Generally have very low costs.
• Not widely available.
• Can only be used for one purpose -- a purpose specified by the government or lending organization.
• Usually geared to low or moderate income homebuyers.

Federally-Insured Reverse Mortgages:

Known as Home Equity Conversion Mortgages (HECMs), these mortgages are backed by the U.S. Department of Housing and Urban Development (HUD).

• High up-front costs, especially if you only plan to stay in the home for a short period of time.
• Widely available.
• Amount you can borrow depends on your age, the type of mortgage you select, the appraised value of your home, current interest rates, and where you live.
• No income or medical requirements
• Can be used for any purpose.
• Provide large loan advances at a lower cost compared to proprietary loans offered by companies.
• Let you chose the form of the loan payout.
• Require you to meet with a government-approved loan counselor.

Proprietary Reverse Mortgages:

Private loans backed by the companies that develop them.

• Generally the most expensive type of reverse mortgage.
• Amount you can borrow depends on your age, the type of mortgage you select, the appraised value of your home, current interest rates, and where you live.
• May pay more to owners of more expensive homes than a federally-insured mortgage will.

*Sources: AARP, Federal Trade Commission (FTC), U.S. Department of Housing and Urban Development