Are you house rich and cash poor? Do you want to have extra money for daily and housing expenses? In the past, you essentially had two options. First, you could sell your home and move. Second, you could borrow against your home and then face monthly loan repayments. Today there is a third possibility – a reverse mortgage.
A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you still own your home. It works much like a traditional mortgage, only in reverse. Rather than making a payment to your lender each month, the lender pays you. This money can provide you with the financial security needed to enjoy your retirement years.
All reverse mortgages turn your home equity into three things: loan advances paid to you; loan costs paid to the lender and others; and leftover equity, if any, paid to you or your heirs at the end of the loan. Money can be paid to you all at once, as a regular monthly advance, at times and in amounts that you select, or some combination of these methods.
The money you receive is paid back, plus interest, when you die, sell your home or permanently move out of the home. You can never owe more than your home’s value at the time the loan is repaid. Because you continue to own your home, you remain responsible for property taxes, insurance and repairs.
All owners of the home must apply for the reverse mortgage and sign the loan papers. You must be at least 62 years of age and occupy the home as your principal residence for most reverse mortgages. There are no income or medical requirements. Typically, single-family homes are eligible for all reverse mortgages, and some programs accept other properties such as condominiums.
The amount of money you can obtain generally depends on your age, your home’s value and location, the cost of the loan and the specific reverse mortgage plan or program you select. Most homeowners get the largest cash advances from the federally-insured Home Equity Conversion Mortgage, or HECM. Another major product is the Home Keeper reverse mortgage developed by Fannie Mae.
Other reverse mortgages are offered by private companies. These loans can be used for any purpose, but are usually more expensive than public reverse mortgages. To find out who offers reverse mortgages in Colorado, go to the Web site of the National Reverse Mortgage Lenders Association at www.reversemortgage.org.
Loan costs can vary considerably depending on the reverse mortgage selected, as they may not include the same types of loan costs. The costs associated with getting a reverse mortgage include the origination fee, an appraisal fee and other charges similar to those for regular mortgages. The Total Annual Loan Cost, or TALC, of a reverse mortgage also depends upon how long you live in your home and what happens to its value during that time. The federal Truth-in-Lending law requires lenders to disclose the TALC for reverse mortgages. For a TALC tutorial, visit www.reverse.org/talctuto.htm.
There are AARP model specifications for analyzing and comparing reverse mortgages. For details, visit www.aarp.org/revmort/ and order a complimentary copy of their publication, "Home Made Money: A Consumer’s Guide to Reverse Mortgages" (#D15601) by calling 1-800-424-3410.
Here are the steps to take in deciding on a reverse mortgage:
1. Awareness-Learn the basics about reverse mortgages.
2. Action-Seek additional information by contacting a lender.
3. Counseling-Obtain mandatory counseling from an approved counseling agency. Contact the Housing Counseling Clearinghouse at 1-800-569-4287 to identify approved counselors within your area.
4. Application/Disclosure-Fill out the application and select payment. The lender discloses the estimated total cost of the loan, the lender collects money for a home appraisal and you provide the lender with required information.
5. Processing-Lender orders appraisal, title work and lien payoffs, etc. Papers are signed.
Because your home is such a valuable asset, you will likely want to consult with your family, attorney and financial advisor before applying for a reverse mortgage. Knowing your rights and responsibilities as a borrower helps to minimize your financial risks and avoid any threat of foreclosure or loss of your home. You should also check on possible tax consequences, effects on eligibility for assistance under federal and state programs and impacts on your estate and heirs.
For more information on reverse mortgages, contact your local Colorado State University Cooperative Extension office. Additional information on Healthy Aging can be found at the Colorado State University Cooperative Extension Web site at www.ext.colostate.edu – select Info Online, Consumer and Family, then Healthy Aging.
By Kenneth R. Tremblay, Jr., Extension Housing Specialist, Colorado State University Cooperative Extension