Reverse mortgages, also known as home equity conversion mortgages, have been gaining popularity over the past few years as a means for older homeowners to supplement their income while staying in their home. While many commercials advertise reverse mortgages as an easy and safe method to collect additional money, few provide specific details about this kind of loan.
At first impression, a reverse mortgage appears attractive. It provides older homeowners an option for obtaining extra income using the equity that has been built up in their home. The bank pays the borrower based on a percentage of that equity. Also, the borrower does not need to make monthly payments. Instead, the loan is re-paid when the borrower dies, sells the home or permanently moves out.
What is important to remember though is that a reverse mortgage is still a loan against your property. There are rules specific to reverse mortgages which may mean it is not a correct option for you. Below are just a few details about reverse mortgages which you should consider:
Equity: In order to qualify for this loan, you either must own the property or have sufficient equity in the home to justify the mortgage.
Age: Your qualification for this type of loan may be dictated by your age. For example, the FHA only offers this type of loan to persons 62 years or older.
Interest and Costs: Banks sell any product, including reverse mortgages, for one purpose: to make a profit. Be aware that the interest charged on this type of loan is typically higher than other products. Also, the costs associated with reverse mortgages are usually higher than a typical loan. Along with the money that you will receive, these high costs are being drawn off the equity in your home and are part of the loan which you are responsible for paying. The difference is that you receive no value for the costs.
Residency: Most people like reverse mortgages because it allows you to stay in the home and still receive income. However, there is a catch. The borrower must live in the home as her primary residence, otherwise the loan becomes due. This includes if the borrower needs to move to an assisted living facility or move in with family due to health reasons. Even if the residency requirement is not a concern for you at the moment, it is something which you should consider given the overall lifetime of the loan. Also, keep in mind that the borrower remains responsible for maintaining costs on the home, such as insurance and taxes, throughout the loan.
Family: Remember that when the borrower dies or sells the home, the reverse mortgage has to be paid. That means in most cases, your children will not inherit your house after you pass. It is possible for your Estate to pay the loan after you pass which would allow your heirs to inherit the property, but the amount of money being distributed to your heirs is then reduced by the amount of the mortgage.
As with any mortgage or financial product, it is always important to obtain as much information as possible before making a decision. Under the right circumstances, a reverse mortgage may be the correct option for you. It is in your best interest to do as much research as possible, and to speak to more than one bank, adviser and/or attorney before entering into any type of agreement, including a reverse mortgage.
The above article is for general informational purposes only and does not convey or express any legal advice or counsel.
Lawrence P. Maya is a personal injury attorney and partner at Stone & Maya, P.C. (312) 283-5609, a multi-service law firm in Chicago, Illinois.