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If you are over or approaching the age of 62 and own your home, you might have been bombarded with all sorts of offers for a reverse mortgage. You might have seen ads on television as well. Though most people understand how a typical mortgage works – that you pay a lender every month, over a set period of time, to buy your home outright – the reverse mortgage is a different beast.
Read on to discover what a reverse mortgage is and how it works.
What is a Reverse Mortgage?
A reverse mortgage is actually a loan, but one in which the lender taps into the equity of your home and pays you a monthly stipend. In other words, it’s a way to turn the equity in your home into cash. You can continue to live in your home during the time the reverse mortgage is in force. In most cases, you don’t have to pay back the money as long as you live in your home.
However, once you and your home part ways, the reverse mortgage must be paid back. This means when you move out of the home, sell it, or pass away, you (or your estate, in the event of your death) are required to pay back the money. Sometimes that might mean selling the home.
There are three types of reverse mortgages:
· Single purpose reverse mortgages. These are offered by state and local government agencies and sometimes by non-profits. They are meant to be used for only one purpose, such as repairing the home, improving it, or paying property taxes. These are good for homeowners with low to moderate income.
· Proprietary reverse mortgages. These are quite similar to private loans. The amount you can get is often based on the value of your home and the size of your mortgage; for instance, a home with a higher appraised value but a lower mortgage balance can lead to much more equity to tap into.
· Home Equity Conversion Mortgages (HECMs). These are insured by the federal government and backed by the U.S. Department of Housing and Urban Development (HUD). These loans are more expensive than a traditional home loan, with higher upfront costs.
One of the biggest advantages of a reverse mortgage is the peace of mind it brings, especially if you are planning to sell your home or instruct your estate to sell it when you pass away. As we get older, we tend to do more and more things that bring that valuable peace of mind, such as opting for a medical alert system, aging in place solutions, and so much more. It may make sense that if you have a great deal of equity in your home, it might be worth cashing it in for that peace of mind.
But surprisingly, less than 1% of all eligible homes carry a reverse mortgage. It is possible that the prevalence of scams concerning these loans – which we will talk about in a moment – scares homeowners away from this potentially sound financial choice.
How a Reverse Mortgage Works
When you choose a reverse mortgage, you get to keep the title to your home. You will not pay monthly mortgage payments, however. The lender will give you an advance on your home equity. That money is tax-free and doesn’t affect your social security or Medicare benefits. You will usually receive this every month.
You must be living in the home as a primary residence to take advantage of the reverse mortgage. If your spouse passes away and you are named on the reverse mortgage, the payments continue as usual until you pass away too. If you aren’t named on the reverse mortgage, however, there are some cases in which you would be allowed to stay in the home.
When you and/or your spouse move out of the home, choose to sell it, or pass away, the reverse mortgage must be paid back.
The Nitty-Gritty Details of Reverse Mortgages
When you purchase an emergency medical alert system from Alert1, you know exactly what you’re getting. There are no hidden fees or surprises. We are transparent about what you will receive with each option, and you choose the one that is best for you.
Unfortunately, not everything is as clear-cut as purchasing that personal alarm button. Reverse mortgages can be quite complicated, and you might wind up paying fees or other costs you didn’t expect. Here are a few of the things that you might encounter when you start the process for a reverse mortgage:
· The fees. Lenders usually charge an origination fee and closing costs, just as you might expect from a typical mortgage. However, they might also charge service fees for the life of the mortgage. Those that are federally insured usually charge mortgage insurance premiums.
· Growing interest. Though you get money every month from the reverse mortgage, the interest you will owe to pay it back grows over time. Most lenders will spell this out for you, so you know what you’re getting into before you sign the paperwork.
· Variable interest. This is a wrinkle in the issue of interest. Reverse mortgages tend to have variable rates. This means that the rates can go up or down each year, depending upon what the financial markets are doing. There is usually no way to predict this. Your interest rate could go up or down, depending upon that year.
· Fixed rate interest. This is often offered by HECMs, but there’s a catch: You don’t get money every month. Instead, you must take the money as a lump sum after closing. This amount might be less than what you would get with a variable interest loan.
· No tax deductions. Though you can usually deduct interest on a typical mortgage, that’s not the case with a reverse mortgage. You can’t claim the interest on a reverse mortgage on your tax return.
· Responsibilities of homeownership. Since you keep the title to your home, you are responsible for the usual things you would expect when owning a home, including the property taxes, utilities, insurance, maintenance, and more. If you don’t keep up with the essentials, like taxes or insurance, your lender can “call in” your loan – requiring you to repay it immediately.
· The “set aside” amount. When you get a reverse mortgage, you will undergo a financial assessment. Depending upon how that looks, your lender might require an amount of money “set aside” for a variety of things, including insurance or taxes. This reduces your payments.
There are obviously many parts to a reverse mortgage, and some of it can be really tough to understand. Someone well-versed in financial planning for seniors can help you understand the terms and conditions of the loan.
What About Your Spouse and Heirs?
What if you decide to sign for a reverse mortgage without your spouse? In some cases, especially if you are the only person named on the deed, it makes sense. But what happens if you die? If you have chosen a HECM loan, there is a very good chance your spouse could continue to stay in the home for the rest of their life. They wouldn’t get money from the reverse mortgage, but they would not be expected to move out either.
It’s important to speak with your heirs about what you plan to do concerning your home, especially if you choose a reverse mortgage. The odds are that they will have to sell the home, or somehow come up with the amount it will take to pay back the loan. They will also learn about something called the “non-recourse clause.” This means that your estate can’t owe more than the value of your home when the loan becomes due or when the home is sold. There are protections against this if you choose the HECM loan, as your heirs would not have to pay more than the appraised value of your home.
Talk to a professional in finance for seniors about how to go about talking to your heirs, or even your spouse, about a reverse mortgage. Make sure all the details are clear and that what would be expected of them – or what they could expect from the mortgage agreement – are understood.
Things to Consider About a Reverse Mortgage
It’s vitally important to do your homework on the variety of options and shop around to get the best deal on a reverse mortgage. Begin this process by asking some pointed questions:
· What is the money for? If you are looking for a loan that will help you pay for essential home repairs or cover back property taxes, you might be better served with a traditional loan based on your home equity. Some areas have programs available that can help you obtain a low-interest loan for significant improvements that enhance the health and safety of those who live in your home. This might include things like walk-in tubs, ramps, and other aging in place options. Your local Area Agency on Aging might be able to help.
· Are there other options? Some areas might finance help for seniors who are having difficulty paying their property taxes. Again, contact your local Area Agency on Aging and ask questions about possible grants for home repairs, property tax deferral programs, or property tax postponement.
· What is the value of your home? If your home has a higher value, you might be able to get a more advantageous interest rate or other perks. Talk with a HECM counselor to figure out what your options are if you own a home that has a higher value.
· What are the fees and costs? This is where shopping around can help. Loan costs, such as the interest rates, closing costs, service fees, and origination fees, vary from one lender to another. Compare the total of the costs and fees as well as looking at them individually – there might be opportunities to negotiate.
· What is the bottom line? The Total Annual Loan Cost (TALC) is the projected annual average cost of a reverse mortgage, including itemized costs. A lender can explain this number and show you what it means in terms of repayment.
How to Avoid Reverse Mortgage Scams
Though reverse mortgages are legitimate financial options, they have also long been used as scams that take aim at personal finance for seniors. This often happens when the reverse mortgage is sold through a salesperson, especially one who is also in the business of selling home improvement services. They might tell you that you need a certain repair or improvement, convince you they can perform the work at rock-bottom prices, then suggest that a reverse mortgage is the best way to pay for it. This can easily lead to fraud, where the seller receives more money than you expected to pay and you are on the hook for the costs and fees of the reverse mortgage.
How do you spot a scam with a reverse mortgage? Here are some signs:
· There is a high-pressure sales pitch.
· You are encouraged to use the reverse mortgage to buy other financial products, like an annuity.
· You are told that those additional financial products are actually required to get the mortgage.
· You’re told that shopping around isn’t going to give you any better deal – or that they can match any other deal, whatever it is.
· You feel as though you are being rushed through the process.
· A salesperson shows up at your door unannounced, without any prior contact from you.
These are some of the top ways to spot this popular scam for the elderly about reverse mortgages. Remember that a reverse mortgage is a serious financial decision that requires plenty of time to consider and research. Reach out to a financial advisor with your local bank or credit union to ask questions, or speak directly to a mortgage counselor.
What If You Fall for A Scam?
A true reverse mortgage allows you the right to cancel the contract within three days. To cancel, you must notify the lender in writing. If you can’t deliver it by hand, send it via certified mail with return receipt requested. This serves as your proof of the date the contract was canceled. The lender then has 20 business days to return any money you have paid them.
If you don’t get your money back, you might be dealing with a fraudulent lender. Talk with your spouse, family, or financial advisor about getting in touch with a mortgage counselor, lender, or home servicer who is associated with the reverse mortgage. File a complaint with the Federal Trade Commission, your state Attorney General’s Office, and the regulatory banking agency in your state.
Please visit Alert-1.com for more senior-friendly blog topics. Here’s to your health and wellbeing!