For older homeowners who are looking for a way to tap into the equity they have built up in their homes over the years, a reverse mortgage can be a good solution. Reverse mortgages allow homeowners to turn their home equity into spendable cash without having to make monthly interest or principal payments.
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