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Reverse Mortgages: What You Need to Know

What Is a Reverse Mortgage?

A reverse mortgage is a home equity loan that permits you to convert some of the equity in your home into cash while you retain ownership. This can be an attractive option for senior citizens who may find themselves "house rich" but "cash poor", but it is not right for everyone. Please read this fact sheet carefully and consult a lawyer before you make any decision.

Equity is the difference between the appraised value of your home and your outstanding mortgage balance. The equity in your home rises as the size of your mortgage shrinks and/or your property value grows. In a reverse mortgage, you are borrowing money against the amount of equity in your home.

As the name says, reverse mortgage works like a traditional mortgage, only in reverse. Instead of a borrower making payments to a lender, the lender makes payments to the borrower. Unlike conventional home equity loans, most reverse mortgages do not require payment of principal, interest and certain fees as long as you live in your home. The money can be used for anything, including living expenses, home repairs and renovations, medical expenses, credit card debt, education, or travel. If you have an existing mortgage, the lender will require that part of the reverse mortgage be used to pay off the balance of the existing mortgage.

In a regular mortgage, your monthly payments reduce your total debt until it is paid off. In a reverse mortgage, your total debt increases as the lender gives you more money. Reverse mortgages are rising-debt loans; meaning that the interest is added to the principal loan balance each month. Since the interest is not paid on a current basis, the total amount of interest you owe increases significantly with time as the interest compounds. With a reverse mortgage, you retain title to your home, so you remain responsible for payment of the taxes, repairs and maintenance.

With a reverse mortgage you can never owe more than the value of the home at the time the loan is repaid. Reverse mortgages are "non-recourse" loans, which means that if you default on the loan or it cannot otherwise be repaid, the lender cannot look to your other assets to meet the outstanding balance on your loan.

Is a Reverse Mortgage Right for You?

When considering whether to apply for a reverse mortgage, you need to determine two important things: first, are you healthy enough to remain in your home and second, do you wish to remain in your home? Are alternatives, such as selling your home and purchasing a smaller, less expensive home, better for you? Will your children, or other heirs, want to inherit the home? Will you get enough money from the reverse mortgage to enable you to live in your home?

Who Can Get a Reverse Mortgage?

How Much Can a Reverse Mortgage Be For?

The amount of the mortgage will depend on the age of the borrower, the value of the home and the current interest rates. In general, the loan amount will be bigger if the homeowner is older, value of the house higher and the interest rates lower. Usually, the loan should not be more than 80% of what the anticipated value of the property at loan maturity (or loan-to-value ratio) will be.

Use the calculator at www.aarp.org/revmort/ to estimate how much cash you might get from a reverse mortgage.

How Can a Reverse Mortgage Be Paid?

What Does It Cost to Apply for a Reverse Mortgage?

Before closing on a loan, the only charge a lender may collect from a borrower is an application fee. That application fee must be designated as such and may not be a percentage of the principal amount of the reverse mortgage or of the amount financed. Any other fees associated with the reverse mortgage may be financed as part of the loan.

Fees, Costs and Payments at Origination

Origination occurs when the lender qualifies the borrower to get the loan, appraises the home, processes all the necessary documents and advances the money to the borrower. The fees, costs and payments which a lender may charge when the loan is originated are:

Fees, Costs and Payments During the Life of the Loan

While the reverse mortgage is outstanding there are a few, limited additional fees and costs that the lender can charge you. The lender can ask that you pay these directly or add them to your loan balance. The only fees, costs and payments which a lender may charge during the loan are:

At the end of the loan

At the end of the loan, there may be additional fees, costs or payments. The lender may charge a termination or maturity fee. This fee would be the actual cost of arranging for the sale or foreclosure of the real property securing the loan. It may include broker's fees, advertising costs, moving and/or storage costs and legal and other fees incurred by the lender. It may not be a flat percentage fee.

Shared Appreciation and Equity Participation

In exchange for a lower interest rate the lender and the borrower may agree to "shared appreciation" or "equity participation." Participation mortgages are so named because the lender "participates," or has the right to a share in any increase in the value of your home as well as the interest on the loan.

A Shared Appreciation Mortgage (SAM) takes into account the appreciation in value of the house between the time the loan is signed and the end of the loan term. The lender receives an agreed-to percentage of the appreciated value of the loan when the loan is terminated.

When Will the Loan Need to Be Repaid?

How Is a Reverse Mortgage Repaid?

The total amount you will owe at the end of the loan ("loan balance") will include the total amount borrowed (including any amounts used to pay fees or costs) and all of the interest that money has accrued.

The Lender's Responsibilities

The lender must give you a statement prepared by the local or county office for the aging on available independent counseling and information services.

The lender must also give you a description of the relevant features of the reverse mortgage being offered. This should include the following information:

The lender can only charge interest on advances of funds actually made from the reserve account and not on the entire balance in the reserve account and if the lender fails to make any payment required under the loan agreement within fifteen (15) days of the due date, the lender must forfeit twice the interest that would have been earned on the outstanding loan principal for the entire period during which payments were suspended, ceased or made late.

Your Rights and Responsibilities

What are the Potential Risks?

What Are the Potential Benefits?

Reverse mortgages can be of benefit to those senior citizens who are reasonably healthy, want to remain in their homes and find that they are "house-rich" but "cash-poor".

Remember:

Do your homework. You should be as well informed as possible, assess the potential rates on a loan, and decide if the benefits outweigh the risks. For additional information on reverse mortgages you can obtain the guide Reverse Mortgage Loans, Borrowing Against Your Home from the Association of American Retired Persons (AARP) at www.aarp.org/revmort. You can also obtain information on reverse mortgages from the Department of Housing and Urban Development (HUD) at www.hud.gov or call 1-800-CALL-FHA (1-800-225-5342).

After closing on a reverse mortgage, you have three business days to reconsider and cancel the agreement. Business days include Saturdays, but not Sundays or legal public holidays. If you decide to cancel, you must do it in writing, using a form provided by the lender or by letter, fax, or telegram that must be hand delivered, mailed, faxed, or sent before midnight of the third business day. You cannot cancel by telephone or in person.

Have an attorney, an accountant, a HUD certified counselor, or other counseling service review the reverse mortgage with you before you make any decisions or sign anything.

Written complaints about mortgage lenders or brokers can be submitted to the Department of Financial Services via our Consumer Complaint Form.

 

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