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What is a Reverse Mortgage?

Reverse Mortgages are a tool to allow older homeowners who are "house rich" and "cash poor" to remain in their homes.

For most Reverse Mortgages, you must be at least 62 years of age and live in your home. The proceeds can come to you as a pre-set monthly payment, or you can have a line of credit and draw funds as you need them.

The more equity you have in your home and the older you are, the more money you can get. You don't pay any money back until the last surviving borrower dies, sells the home, or no longer uses the home as a principal residence.

Three types of Reverse Mortgages

• The single purpose reverse mortgage. These are offered by some state and local government agencies and nonprofit organizations. They are not available everywhere and they are for a single use only - such as home repairs or property taxes. In most cases, you can qualify for these loans only if your income is moderate to low.
• Home Equity Conversion Mortgages (HECM's) are the most common. They are backed by the U.S. Department of Housing and Urban Development, and are federally-insured loans. You can use the proceeds for any purpose you choose.
• Proprietary Reverse Mortgages are private loans that are backed by the companies that develop them.

HECM's

HECM's are generally more expensive than home purchase loans, because the up-front costs are high. Reverse Mortgage loans are widely available, have no income or medical requirements, and can be used for any purpose.

Because you are risking the equity in your home, the rules governing HECM's are strict. You must meet with a counselor and thoroughly understand the costs, financial implications, and alternatives before obtaining a reverse mortgage.

The risks of a Reverse Mortgage

• Origination fees and closing costs may be high and the lender may charge a monthly servicing fee.
• Your debt grows monthly, and as you take draws. Interest is charged on the outstanding balance and added to your balance each month.
• Reverse Mortgages may have a fixed rate of interest, but most are variable rates and subject to increase.
• Reverse Mortgages can eat up most or all of the equity in your home - leaving nothing for you or your heirs.
• Because you retain title, you remain responsible for taxes, insurance, maintenance, utilities, etc. Failure to pay taxes or insurance could cause the reverse mortgage loan to become due and payable.
• Interest is not deductible

Before you decide to use a Reverse Mortgage, ask your Mouse House Mortgage counselor to explain the Total Annual Loan Cost rates, which will itemize and show all the costs involved with a Reverse Mortgage.

For a report on Reverse Mortgages from the Federal Trade Commission, and information on more resources go to: http://www.ftc.gov/bcp/conline/pubs/homes/rms.pdf 

Beware of Fraud

Older homeowners seem to be a prime target for "snake oil" salesmen, so beware. If anyone tries to sell you something and suggests that you take out a Reverse Mortgage to pay for it, consult with an independent advisor before considering it.

Proprietary reverse mortgages can be offered as part of a scam to part you from your home. Be very sure that the people you are dealing with are honest. Do check their references, check with the Better Business Bureau, and more. Through the wonders of the internet, you can find news articles, forum posts, and blog entries that will let you know if others have been happy dealing with this company - or if they think you should run the other way.

After you've checked all the details about the Proprietary reverse mortgage offered - and the company offering it - get the details on a similar HECM and make comparisons. Don't agree to anything until you know all the facts.

An honest lender will be very happy to show you ALL of the associated costs and fees, and complete information on reverse mortgage interest rates, repayment, etc. before asking you to sign a thing.