A reverse mortgage can be a good option for some senior citizens who need extra cash and either own their home "free and clear" or have only a small balance on their mortgage. But some promotions of reverse mortgages make these home loans sound like "free money from the government." Don't be misled by such promotions. A reverse mortgage, which may also be called a home equity conversion plan, is never "free money." CLICK HERE
to see a recent direct mail piece sent to senior citizens in Kentucky and Southern Indiana. Every statement in this promotion may be true, but the mailer hardly tells "the whole truth." Consider these points:
- The promotion says this is a "New Government Program." Not really. Reverse mortgages have been aroound for years. The loans are not issued by the government, but by private companies subject to certain government regulations that are intended to protect seniors.
- The promotion says you can retain retain title to your home. Yes, but you will have a mortgage lien against the title.
- The promotion says "property passes to heirs." Yes, but the property will pass to your heir with a mortgage that may require paying part or even all of the home's value to the mortgage company.
Every senior homeowner faces a different situation. Depending on your situation, a reverse mortgage may be a good option or it may be a very expensive way to gain access to money tied up in your home. Deciding whether a reverse mortgage is right for you requires careful consideration of your overall financial situation, as well as factors such as your age and health status and how long you can realistically expect to live in your home.
Reverse mortgages allow homeowners to turn their home equity into spendable cash without having to make monthly interest or principal payments. In the right situations, these mortgages can be a great option for a senior citizen who needs extra cash or extra monthly income. But the Better Business Bureau encourages you to research these loans carefully and to take your time. Talk to an independent financial advisor and consult family members and friends you trust.
Under a reverse mortgage, the lender sends the borrower money via a lump-sum payment, a line-of-credit, monthly check or a combination of all three. The homeowner is not required to pay back any of the loan advances or interest until the loan term is over. Generally, no repayment is due until the borrower no longer occupies the house.
Before venturing into a reverse mortgage the Better Business Bureau, along with the Federal Trade Commission suggest that homeowners consider the following facts:
- 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.
- There are three types of reverse mortgages — Federal Housing Administration (FHA)-insured, lender-insured, and uninsured — and these 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, while 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.
- 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.
Before signing any contracts for a reverse mortgage, be sure to check on the reliability of the company with the BBB at www.bbb.org. The BBB also provides complaint and dispute resolution assistance for consumers to seek recourse and achieve a fair settlement if they have been treated unfairly in the lending process.
For more specific information about reverse mortgages contact the Home Equity Information Center of the American Association of Retired Persons (AARP) or go to www.aarp.org/money/revmort