A Reverse Mortgage –
Is it Right For You?

By Shannon Wood

For many senior citizens it can be frustrating and depressing to find that they don’t have the means to support themselves. This may happen after a major health crisis, or realizing planning for retirement was not sufficient to keep up with the cost of living. Most seniors do not want to ask for assistance from family and/or friends. Reverse mortgages may offer an alternative to these issues in the right circumstances.

What Are Reverse Mortgages?

A reverse mortgage is a loan against your home that you don’t have to pay back, as long as you still live in your home. The loan is due as soon as the borrower moves out of the home or dies. The reverse mortgage loan is not available to everyone – you have to be at least 62 years of age and own your own home. You don’t have to borrow a large sum of money to be paid to you in full, you have choices on how you receive the money. The options include a lump sum loan, a credit line, monthly payments, or a combination of these options. (Not all reverse mortgages are the same, some do not allow all of these choices.) This type of loan does incur fees such as loan origination fees, and it does carry interest. The older a person is, the more they may receive through a reverse mortgage. The total amount of interest and fees combined with the money borrowed during the loan period cannot exceed the value of your home.

Considerations When Making A Decision

Some of the issues to consider before deciding upon a reverse mortgage are whether or not you want to stay in your home or are capable of staying in your home for a long period of time. If downsizing to an apartment or moving to a retirement community sounds favorable to you or would benefit you in your situation, a reverse mortgage is probably not the best option. You can receive the funds you need through selling your home. If you want to leave your home to your children for living purposes without incurred debt, a reverse mortgage is probably not the best plan for you. But, if you want to stay in your home and need additional cash flow, and your children do not intend to live in the home or you are not leaving the home for your children as an inheritance, then this may be a desirable option.

It is good to meet with a housing counselor about all of your options. There are federal regulations in place to assist you in making an informed decision that is right for you. The Truth in Lending Act requires that you are aware of all costs associated with your loan. Legally you have three business days to change your mind after signing the paperwork for a Reverse Mortgage. There are always options available for obtaining funds. Just remember to always be a careful consumer when making financial decisions. Shop around and listen to your intuition – if you don’t feel right about a product or a person trying to sell you a product, walk away. If you make informed decisions, you can look forward to a less stressful retirement.

Different Types of Reverse Mortgages

• Home Equity Conversion Mortgage (HECM) – The Federal Government insures this type of conversion mortgage through the Federal Housing Administration. The HECM has been around the longest (since 1989) and is the most popular reverse mortgage loan. In order to obtain a HECM you must first talk with a housing counselor approved by the Department of Housing and Urban Development. There are caps on the amount of money determined by the county for borrowing the money. For instance if your home is worth $250,000 and the county cap is $100,000, you cannot borrow more than $100,000 against your home.
• Single Purpose Reverse Mortgages – This the lowest cost reverse mortgage. It is typically offered by state and local government agencies and/or non-profit organizations. The drawbacks to this type of reverse mortgage are that it can only be used for one purpose. The one purpose reverse mortgage is typically available for home modifications, repairs, or property taxes. These loans are also hard to find and are not available everywhere. The community action council, county office and/or Area Agency on Aging in your area will probably be able to tell you of any single purpose reverse mortgage opportunities available to you.
• Proprietary Reverse Mortgages – These are private loans that are backed by the companies that produce them. The loan limits are the largest, but the additional loan costs can also be more expensive.

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