Produced in cooperation with the American Association
of Retired Persons
If you are age 62 or
older and are "house-rich, cash-poor," a reverse mortgage (RM) may be an
option to help increase your income. However, because your home is such a
valuable asset, you may want to consult with your family, attorney, or
financial advisor before applying for an RM. Knowing your rights and
responsibilities as a borrower may help to minimize your financial risks
and avoid any threat of foreclosure or loss of your home.
and the National Center or Home Equity
brochure explains how RMs work. It describes similarities and differences
among the three RM plans available today: FHA-insured; lender-insured; and
uninsured. It also discusses the benefits and drawbacks of each plan. Each
plan differs slightly, so be careful to choose the plan that best meets
your financial needs. Organizations and government agencies that offer
additional information about RMs are listed at the end of this brochure.
How Reverse Mortgages Work
A reverse mortgage is a type of home equity loan that allows you to
convert some of the equity in your home into cash while you retain home
ownership. RMs works much like traditional mortgages, only in reverse.
Rather than making a payment to your lender each month, the lender pays
you. Unlike conventional home equity loans, most RMs do not require any
repayment of principal, interest, or servicing fees for as long as you
live in your home. Funds obtained from an RM may be used for any purpose,
including meeting housing expenses such as taxes, insurance, fuel, and
Requirements and Responsibilities
of the Borrower
To qualify for an RM, you must own your home. The RM funds may be paid
to you in a lump sum, in monthly advances, through a line-of-credit, or in
a combination of the three, depending on the type of RM and the lender.
The amount you are eligible to borrow generally is based on your age, the
equity in your home, and the interest rate the lender is charging.
Because you retain title to your home with an RM, you also remain
responsible for taxes, repairs, and maintenance. Depending on the plan you
select, your RM becomes due with interest either when you permanently
move, sell your home, die, or reach the end of the pre-selected loan term.
The lender does not take title to your home when you die, but your heirs
must pay off the loan. The debt is usually repaid by refinancing the loan
into a forward mortgage (if the heirs are eligible) or by using the
proceeds from the sale of your home.
of Reverse Mortgages
Listed below are some points to consider about RMs.
* RMs are
rising-debt loans. This means that the interest is added to the principal
loan balance each month, because it is not paid on a current basis.
Therefore, the total amount of interest you owe increases significantly
with time as the interest compounds.
* All three plans
(FHA-insured, lender-insured, and uninsured) charge origination fees and
closing costs. Insured plans also charge insurance premiums, and some
impose mortgage servicing charges. Your lender may permit you to finance
these costs so you will not have to pay for them in cash. But remember
these costs will be added to your loan amount.
* RMs use up some
or all of the equity in your home, leaving fewer assets for you and your
heirs in the future.
* You generally can request a loan advance at
closing that is substantially larger than the rest of your payments.
* Your legal obligation to pay back the loan is limited by the
value of your home at the time the loan is repaid. This could include
increases in the value (appreciation) of your home after your loan begins.
* RM loan advances are nontaxable. Further, they do not affect
your Social Security or Medicare benefits. If you receive Supplemental
Security Income, RM advances do not affect your benefits as long as you
spend them within the month you receive them. This is true in most states
for Medicaid benefits also. When in doubt, check with a benefits
specialist at your local area agency on aging or legal services office.
* Some plans provide for fixed rate interest. Others involve
adjustable rates that change over the loan term based upon market
* Interest on RMs is not deductible for income tax
purposes until you pay off all or part of your total RM debt.
How Reverse Mortgages Differ
This section describes how the three types of RMs -- FHA-insured,
lender-insured, and uninsured -- vary according to their costs and terms.
Although the FHA and lender-insured plans appear similar, important
differences exist. This section also discusses advantages and drawbacks of
each loan type.
* FHA-insured. This plan offers
several RM payment options. You may receive monthly loan advances for a
fixed term or for as long as you live in the home, a line of credit, or
monthly loan advances plus a line of credit. This RM is not due as long as
you live in your home. With the line of credit option, you may draw
amounts as you need them over time. Closing costs, a mortgage insurance
premium and sometimes a monthly servicing fee is required. Interest is
charged at an adjustable rate on your loan balance; any interest rate
changes do not affect the monthly payment, but rather how quickly the loan
balance grows over time.
The FHA-insured RM permits changes in
payment options at little cost. This plan also protects you by
guaranteeing that loan advances will continue to be made to you if a
lender defaults. However, FHA-insured RMs may provide smaller loan
advances than lender-insured plans. Also, FHA loan costs may be greater
than uninsured plans.
* Lender-insured. These RMs
offer monthly loan advances or monthly loan advances plus a line of credit
for as long as you live in your home. Interest may be assessed at a fixed
rate or an adjustable rate, and additional loan costs can include a
mortgage insurance premium (which may be fixed or variable) and other loan
Loan advances from a lender-insured plan may be larger than
those provided by FHA-insured plans. Lender-insured RMs also may allow you
to mortgage less than the full value of your home, thus preserving home
equity for later use by you or your heirs. However, these loans may
involve greater loan costs than FHA-insured, or uninsured loans. Higher
costs mean that your loan balance grows faster, leaving you with less
equity over time.
Some lender-insured plans include an annuity
that continues making monthly payments to you even if you sell your home
and move. The security of these payments depends on the financial strength
of the company providing them, so be sure to check the financial ratings
of that company. Annuity payments may be taxable and affect your
eligibility for Supplemental Security Income and Medicaid. These "reverse
annuity mortgages" may also include additional charges based on increases
in the value of your home during the term of your loan.
Uninsured. This RM is dramatically different from FHA and
lender-insured RMs. An uninsured plan provides monthly loan advances for a
fixed term only -- a definite number of years that you select when you
first take out the loan. Your loan balance becomes due and payable when
the loan advances stop. Interest is usually set at a fixed interest rate
and no mortgage insurance premium is required.
If you consider an
uninsured RM, carefully think about the amount of money you need monthly;
how many years you may need the money; how you will repay the loan when it
comes due; and how much remaining equity you will need after paying off
If you have short-term but substantial cash needs, the
uninsured RM can provide a greater monthly advance than the other plans.
However, because you must pay back the loan by a specific date, it is
important for you to have a source of repayment. If you are unable to
repay the loan, you may have to sell your home and move.
Reverse Mortgage Safeguards
One of the best protections you have with RMs is the Federal Truth in
Lending Act, which requires lenders to inform you about the plan's terms
and costs. Be sure you understand them before signing. Among other
information, lenders must disclose the Annual Percentage Rate (APR) and
payment terms. On plans with adjustable rates, lenders must provide
specific information about the variable rate feature. On plans with credit
lines, lenders also must inform you of any charges to open and use the
account, such as an appraisal, a credit report, or attorney's fees.
For More Information
If you are interested in obtaining a current list of lenders
participating in the FHA-insured program, sponsored by the Department of
Housing and Urban Development (HUD), or additional information on reverse
mortgages and other home equity conversion plans, write to:
Home Equity Information Center American Association of Retired Persons 601
E Street, N.W. Washington, D.C. 20049
For additional information,
you also may contact the:
National Center for Home Equity
Conversion 7373 - 147 St. West, Suite 115 Apple Valley, MN 55124
This organization requests that you send a self-addressed stamped