I know that if something sounds too good to be true, it probably is. When you read the title of this article, the phrase "There Ain't No Such Thing As A Free Lunch" (TANSTAAFL) probably came to mind. But if you are 62 years old or older, you may have just found the golden goose.
The name says it all: a reverse mortgage is just what it sounds like. Instead of you giving a mortgage company money every month, the company gives you money. There are three different kinds of reverse mortgages, and all of them have the same requirements for who can get them.
You have to be at least 62 years old, live in your home, own it, and sign a contract. You also need to have equity in your home, and the interest rate is based on what the lender is charging for non-reverse mortgages (more on this later). Also, the lender will have your property appraised, which you may or may not have to pay for.
There are no limits on income like there are with Social Security, and most of them are tax-free because they don't come with extras like an annuity. They also don't change your benefits from Social Security or Medicare.
This article only talks about mortgages that don't have any extra features. If you want to learn more about reverse mortgages with extra features, you should talk to a tax expert. This will help you avoid breaking tax laws.
On the FTC's website (www.ftc.gov/bcp/online/pubs/homes/rms.htm), there is a great article about reverse mortgages, but it doesn't talk about mortgages with extra features. Another good reason to talk to a tax expert.
This tool, called a "reverse mortgage," is a loan, so it has an interest rate. It lets senior citizens, or "the elderly," as some people call them, turn some of the equity in their home into cash without having to sell it. Because it is a "reverse loan," you get money each month instead of having to pay money each month while you live in your home.
But this loan must be paid back with interest if you sell the house, die, stop living there as your main home, or reach the end of the loan period you chose. You still have to pay property taxes, insurance, and any other costs that come with owning a home. You would have to do this with or without a reverse mortgage.
Now that you've explained it, the picture is clearer, right? You get a tax-free amount each month that you don't have to pay back until a certain date in the future. You also get to stay in your home. As close as you can get to a win-win situation in this day and age.
It doesn't take a genius to figure out that anyone who is short on cash but has a nice house should at least look into this tool. But like any other document that requires you to sign on the dotted line and puts you under a financial obligation, you need to know a few things before you sign.
I told you that there are three different kinds of reverse mortgages. The first is the reverse mortgage for a single purpose. Some state and local government agencies as well as non-profit groups offer these.
You might not be able to get them where you live. Call the Department of Senior Services in your county. You can find their phone number in the white pages under your county.
Single-minded means just that. The money can only be used for what the lender says, and most loans are only given to people with low or moderate incomes. When you call your county, make sure to ask if their reverse mortgage is only for one thing and how much you can borrow.
A Home Equity Conversion Mortgage is the second type of reverse mortgage (HECM). These mortgages are insured by the federal government, and the Department of Housing and Urban Development backs them up (HUD). Most of the time, the upfront costs are high, especially if you only plan to stay in your home for a short time. However, there are no restrictions on income or health, and they can be used for any purpose.
All HECM applicants must also meet with a counsellor from a government-approved, independent housing counselling agency. Says the FTC, "The counsellor must explain the loan's costs, how it will affect the borrower's finances and any other options. For example, counsellors should tell you about government or non-profit programmes for which you may qualify, as well as any single-purpose or proprietary reverse mortgages that are available in your area."
The nursing home clause is another perk of a HECM mortgage. If a borrower has to move out of her home and into a nursing home or other medical facility, she has up to 12 months before the loan is due. This makes it easier to plan for the money.
A proprietary reverse mortgage is the third type. These are private loans that are backed by the businesses that give them out. In other words, the government does NOT cover them. Like HECMs, a proprietary reverse mortgage could have a high-cost upfront.
Cost-wise, a reverse mortgage is the same as a regular mortgage. Most of the time, the lender sets the loan origination fees, closing costs, insurance premiums (for insured loans), and service fees.
The federal Truth in Lending Act (TILA) applies to reverse mortgages, just as it does to other types of mortgages. This means that the lender MUST tell you about the costs and terms of the reverse mortgage you want.
The annual percentage rate (APR) and terms of payment must be clear and not buried in small print. If you choose a credit line as your loan, the lender must tell you how much it will cost to open the account and use it.
A word more about the interest rate, which is the same as for a regular mortgage. Interest rates can be fixed or variable, just like with a regular mortgage. Variable rates are tied to a financial index. This means that when the index changes, so will the rate.
This information has to be given out by the lender because of TILA. TILA doesn't require the lender to tell you that the reverse mortgage may or may not use up all of your equity. If the contract has a "non-recourse" clause, which most do, you must be told that when the loan is paid off, you won't owe more than the value of your home. This is something good.
The HECM gives you the most freedom out of the three. It lets you choose how you want to get your money. For instance, you can get a fixed amount of cash every month for a certain amount of time or as long as you live in your home. You can also choose to get a line of credit.
With a line of credit, you can take money out of the loan whenever and however much you want. The HECM lets you choose from both options. You can get both monthly payments and a credit line.
The key is to read and understand every part of the contract before you sign it. If you don't understand something, don't be afraid to ask questions. Don't let a big monthly payment affect how well you think and decide.
Both HUD and the FTC have toll-free phone numbers and websites that can help you decide what to do. HUD's website is:. You can call them at 1-888-466-3487.
http://www.hud.gov/offices/hsg/sfh/hecm/rmtopen.cfm The FTC's website is http://www.ftc.gov/credit, and you can call them at 1-877-382-4357.
After reading the above, you may have come to the conclusion that the goose with the golden eggs is actually a vulture waiting to eat your body. Or, you might have decided that the goose's eggs are worth your time. Either way, you now know more about how to buy things.
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