Get the Facts Before Cashing In On Your Home’s Equity
Whether seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses, many older Americans are turning to “reverse” mortgages. They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.

Usually, you make monthly payments to the lender. But in a “reverse” mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations.

To qualify for most reverse mortgages, you must be at least 62 and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions. You can use the income for anything you choose, such as living expenses, travel, paying off debts, buying a new car, home remodeling, medical care, assisted care or prescription drugs.

The Most Popular Type of Reverse Mortgages
The federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), are backed by the U. S. Department of Housing and Urban Development (HUD). There are also proprietary reverse mortgages, which are private loans are backed by the companies that develop them.

One thing to note, the HECMs and proprietary reverse mortgages tend to be more costly than other home loans. Because the up-front costs can be high, it’s generally most expensive if you’re planning to stay in your home for just a short time. On the plus side they are widely available, have no income or medical requirements, and can be used for any purpose.

Before applying for a HECM, the federal government requires that you meet with a counselor from an independent government-approved (HUD) housing counseling agency. The counselor will explain the loan’s costs, financial implications, and alternatives. For example, counselors should tell you about government or nonprofit programs for which you may qualify, and any single-purpose or proprietary reverse mortgages available in your area.

The amount of money you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.

A HECM gives you choices in how the loan is paid to you. You can select fixed monthly cash advances for a specific period or for as long as you live in your home. Or you can opt for a line of credit, which allows you to draw on the loan proceeds at any time in amounts that you choose. You also can get a combination of monthly payments plus a line of credit.

HECMs generally provide larger loan advances at a lower total cost compared with proprietary loans. But owners of higher-valued homes may get bigger loan advances from a proprietary reverse mortgage. That is, if you have a higher appraised value without a large mortgage, then you may likely qualify for greater funds. Location (for example, your neighborhood) is only one part of the determination of appraised value.

Things to Remember:

• Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits.
  
  
• In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.
  
  
• The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
  
  
• Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A “nonrecourse” clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid. Look for this clause, some other reverse mortgage products may call the note when the home equity is low or gone.
  
  
• Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don’t pay property taxes, maintain homeowner’s insurance, or take care of the property you risk the loan becoming due and payable.
  
  
• Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
  
  
• All HECM lenders must follow HUD rules, and many of the loan costs including the interest rate will be the same no matter which lender you select. Still, some costs including the origination fee, other closing costs, and servicing fees may vary among lenders.
  
  
• If you live in a higher-valued home, you may be able to borrow more from a proprietary reverse mortgage. But it generally will cost more. The best way to see key differences between a HECM and a proprietary loan is with a detailed side-by-side comparison of future costs and benefits. Many HECM counselors and lenders can provide you with this important information.
  
  
• No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.
  
  
• Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives. The best defense is a good offence – find out what all your options are during a FREE consultation with Bob Willett. Just give him a call at (916) 485-7939 to make an appointment.

Much of the information contained in this document was provided by the:

Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
1-877-FTC-HELP (1-877-382-4357)

The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov.