Title:
A Primer on
Reverse Mortgages
Word Count:
713
Summary:
Many people
approaching retirement age are "equity rich" and "cash
poor" at the same time. It is not unusual today to find people living in
$1 million homes who are almost entirely dependent on social security to get
by. This primer on reverse mortgages may provide a way to secure your future.
Keywords:
reverse
mortgages, reverse mortgage, HECM mortgage, house keeper mortgage
Article Body:
Economists report
that as housing prices have skyrocketed over the past several years, the amount
of money that households are saving through 401(k) plans and FDIC insured
savings accounts has fallen. For many people approaching retirement age
that means they may be "equity rich" and "cash poor" at the
same time. It is not unusual today to find people living in $1 million homes
almost entirely dependent on social security to get by.
A 1994 Advisory Council on Social Security trends and issues concluded that
reverse mortgages could provide an additional source of income for seniors
although at the time housing prices were not high enough to make this a
meaningful source. Well, things have changed.
A reverse mortgage is still a loan with your house as the collateral, but it is
entirely different from the kind of mortgage you got when you bought your first
house. These are the major differences:
The Lender Pays You
That's correct. You do not make a monthly payment with a reverse mortgage. The
lender pays you, and the loan can be set up so that you can get paid in a lump
sum, you can get paid regular monthly amount, or you can get paid at the times
and in the amounts you request.
The terms of the loan determine what each of these amounts would be. The
primary determining factors are your age, the value of your house, and the
prevailing interest rates at the time.
You Continue to Live in Your House
Staying in your house is really the whole purpose of reverse mortgages when you
get down to it. The twist is that instead of paying somebody else to live
there, you get paid while you continue to live there.
You are actually required by the terms of the loan to continue to live in the
house as your principal residence. You can spend any amount of time visiting
your children and grandchildren, you can travel for pleasure, and you can
continue to spend summers at the lake so long as the house remains your
principal residence.
You Retain Ownership of Your House
A reverse mortgage is not a sale. You keep all the rights of ownership that you
had before the reverse mortgage loan. You do not need the lender's permission
to paint the house a different color or to remodel. You can put your house on
the market and sell it to the highest bidder. You can will it to your children.
If there is a change in ownership, such as by sale or through the death of the
last surviving owner, the reverse mortgage will have to be paid off at that
time. The lender would be entitled to receive from the proceeds of the sale
only the amount you actually received from the lender plus all accrued and
unpaid interest to date. Any amount remaining after paying off the reverse
mortgage lender would go to you, to your surviving spouse, or to your
estate.
The Principal Amount of the Loan Increases With Each Payment
Another way of saying this is that you control the amount that must eventually
be paid back by controlling the amount of money you actually get from the
lender. A reverse mortgage is still a loan, and the money plus interest has to
be paid back at some time, usually from the sale of the house after you and
your spouse no longer live there.
Because the principal amount of a reverse mortgage cannot be determined until
after you no longer live at the property, neither can the maturity date of the
loan. This can a difficult concept to wrap your mind around because it is so
different from conventional mortgages.
You Can Never Owe More Than the Value of Your House
This is true for the two reverse mortgage products sponsored by the Federal
government (HECM and Home Keepers) although it may not be true for privately
created reverse mortgage programs.
The benefit of the Federal programs is that you, your surviving spouse, or your
estate, can never owe more than the loan balance or the value of your house,
whichever is less. Your reverse mortgage lender cannot require repayment from
you, your surviving spouse, or your heirs, or from any asset other than your
house.