|By Siddarth Nagaraj on February 2, 2011
Across the country, an increasing number of seniors find their ability to control their most precious assets weakening as individuals struggle to deal with the economy. If you find after reassessing your financial situation that your ability to maintain possession of your house is at risk, it may be worth considering a reverse mortgage.
While the term “reverse mortgage” may seem slightly confusing at first, it can be explained easily. A reverse mortgage is a home loan which partially converts the equity in your home into cash. Unlike a “regular” mortgage (in which the lender receives payments from you), a reverse mortgage establishes terms under which the lender grants a loan determined according to your house’s equity. In further contrast to a home equity loan or second mortgage, payment is not required for the duration of your use of the house as your principal residence as long you meet all mortgage obligations. Requirements include primary residence in the house and payment of property taxes, as well as basic maintenance and repairs. The loan must be repaid when you no longer permanently reside in the house, whether due to migration or death. When the loan is about to be repaid, your estate can be protected from owing more than the value of your house through a “recourse clause” in the reverse mortgage contract.
There are different forms of reverse mortgages. Single-purpose reverse mortgages, which are offered by some state and local agencies, have limited applicability (as the name suggests). They are also the least expensive and may only be used to fulfill a particular financial housing-related obligation. Federally-insured reverse mortgages, which are the most commonly used, are backed by the Federal Housing Administration. Formally known as Home Equity Conversion Mortgages (HECMs), these reverse mortgages offer payments in multiple forms. “Term” HECMs provide fixed monthly payments for a specified period of time while “tenure” HECMs offer fixed monthly payments for the duration of your stay in your house.
In order to obtain a HECM, you must meet with a counselor from a federally-approved independent agency before you can apply. The counselor’s responsibility is to explain mortgage implications and payment options. The U.S. Department of Housing and Urban Development’s website provides resources to find a counselor, but you may also call 1-800-569-4287. Although most counselors charge a fee, you cannot be denied services if you are unable to pay.
Reverse mortgages are available to those who are at least 62 and have paid off all or most of their mortgage. Although reverse mortgages are available to all regardless of income, the amount that you will be able to borrow will depend on how valuable your house is, how low the current interest rate is, and how old you are.
When contemplating a reverse mortgage, there are several things worth considering: firstly, many reverse mortgages come with origination fees as well as service and closing costs. Secondly, interest is also not deductible until you have paid off the loan. Additionally, most reverse mortgages have variable rates which are tied to market conditions and correspondingly fluctuate.
Reverse mortgages can provide support to those who have worked hard their whole lives but find that their finances are insufficient for sustain themselves for the future. While a Home Equity Conversion Mortgage might be the right way to ensure that you can stay in your home, always be aware of the full financial implications that such an agreement carries.
Note: While HECM products are heavily regulated by FHA to ensure consumer safety, some financial institutions offer their own versions of reverse mortgages which may not carry the same protections. For more information, contact the Department of Housing and Urban Development (HUD).