Reverse Home Mortgage: Proceed with Care

In order to better understand the reverse mortgage, it helps to review a conventional or “forward” mortgage. In a forward mortgage the loan balance on the amount owed gets smaller with each monthly repayment to the lender. As one pays on a forward mortgage the value of the home usually increases. The equity in the home increases over time as debt decreases.

A reverse mortgage is a loan against one’s home that can be paid all at once, as a regular monthly advance, or at times and in amounts that have been chosen by the reverse mortgage holder. The reverse mortgage allows borrowers to “spend down” their home equity while still living in the home, without having to make monthly loan repayments. This feature may be very desirable to those homeowners with large amounts of equity built up in their existing mortgages. The mortgage holder (or the estate) pays the money plus interest back upon death, sale of the home or if the holder permanently moves out of the home. All reverse mortgage borrowers must be at least 62 years of age and must occupy the home as a principal residence. Single family one-unit homes, condominiums and manufactured homes qualify; however, mobile homes are generally not eligible for a reverse mortgage.

Reverse mortgage loans typically require no repayment for as long as the mortgage holder lives in the home. If no monthly payments are made, the amount owed grows larger over time. As debt grows larger, the amount of cash or equity that will be left after selling and paying off the loan generally grows smaller. Reverse mortgage holders continue to own their homes, being responsible for taxes, insurance, repairs and maintenance of the property.

Some reverse mortgages are offered by state and local governments. The total amount of money for which one is eligible depends on the specific reverse mortgage plan or program selected. There may be fees associated with origination of the loan, closing costs, and sometimes a monthly service fee in addition to interest on the loan. The federally insured Home Equity Conversion Mortgage (HECM) is typically the least expensive private sector reverse mortgage lender.

It is important to remember that reverse mortgages may have tax consequences, affecting eligibility for assistance under federal and state government assistance programs, and may impact the estate and heirs of the homeowner.

For most consumers the home is the single largest investment. It is crucial to investigate and understand all of the financial ramifications of a mortgage before committing to any change.

Helpful Online Resource:
http://hud.gov/buying/reverse.cfm