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Financial Literacy - Retirement
 

Reverse Mortgages

Reverse mortgages give senior citizens who are "house rich, cash poor" the opportunity to capitalize on their home equity. The money obtained in this loan can be spent for any purpose. Reverse mortgages can be a convenient way to get cash without having to get a traditional loan; however, be aware of the following.

Type of Home Equity Loans

  • Home equity becomes liquid money, while you retain ownership of your home.
  • Unlike a traditional home equity loan, the borrower is not required to repay the principal, interest, or service fees as long as he/she is living in the home.
  • The loan may also be used for any purpose.

Requirements

  • The borrower must own the home and be at least 62 years old.
  • The loan can be paid in a lump sum, installments, line of credit, or in a combination of the three, depending on the lender.
  • Eligibility is based on many factors (i.e. age, home equity, interest of the lender)
  • Because the borrower retains the title to the home, the lender cannot seize the home.
  • If the borrower dies, it is up to his/her heirs to repay the loan.
    • Refinance into a traditional "Forward Payment Loan" or pay the loan with proceeds from the sale of the home.

Features

  • Interest is added to the principle each month. The amount of interest that the borrower owes increases more rapidly as it is compounded with time.
  • Reverse mortgages charge origination fees and closing costs in addition to the interest
  • By definition, reverse mortgages lower your home equity and decrease home equity and leave the borrower and his/her heir(s) with fewer assets.
  • Generally, the borrower can request an advance that is substantially larger than the subsequent payments.
  • The obligation to pay back the loan is limited by the value of the home at the time of repayment, not the value of the home when the loan was issued.
  • Reverse mortgage advances are nontaxable and do not effect Social Security or Medicare benefits.
  • The interest accumulated on the loan is not tax deductible until all or part of the loan is repaid.

Types of Reverse Mortgages

  • Federally Insured
    • Offers a full range of payment options (i.e. lump sum, installments, line of credit, or combination of the three)
    • Loan does not come to term as long as the borrower lives in the home.
    • Interest is charged on an adjustable rate
    • Provides greater options, but small advances
    • Greater loan costs and fees
  • Single-purpose
    • Offers monthly home advances in addition to a line of credit as long as the borrower lives in his/her home.
    • Interest rate can be fixed or variable
    • Advances can be larger than with a single-purpose mortgage.
  • Proprietary
    • Offers the possibility of the greatest advance.
    • Loan is issued for only a fixed time with a fixed amount of interest.
    • The borrower must have the means to repay the loan when it is due or he/she will have to sell the home in order to repay the reverse mortgage.

Advantages

  • The loan can be used for any purpose.
  • There is not a minimum income requirement.
  • Proceeds of the loan are not subject to taxes.
  • There is no danger that the borrower will have to pay more than the value of the house.

Disadvantages

  • Reverse Mortgages can be confusing.
  • Generally, they are more costly to set up than other types of loans.
  • Payments can have an effect on eligibility for public aid, specifically Supplemental Security Income and Medicaid.
  • There have been cases of abuse by the lender. Borrowers need to be careful when choosing a lender. Obtain three (3) bids before signing.
  • Charge origination fees and closing costs in addition to interest.
  • Result in lower home equity and fewer assets.

As when getting any loan, be sure to shop around. Compare at least three (3) bids to find the best deal and use common sense. Don't sign anything unless all parts of the document are filled out and don't succumb to high-pressure tactics. Always remember that you have three (3) business days to cancel a loan before it becomes legally binding.

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