Reverse mortgages have become an increasingly popular way for
seniors to keep pace with rising expenses. Typically, people borrow against
their home equity and continue to live in the home with no monthly mortgage
payment until they move out permanently, sell the property or die.
Recognizing that many seniors would prefer to downsize homes after
retirement or relocate to another area, however, the government issued new
guidelines that now allow reverse mortgages to be used to purchase a new home,
provided proceeds from the sale of the old home (combined with other cash
reserves, if necessary) cover the sales price, plus closing costs.
The advantage for these folks is that they donít have to tap as
much of their savings or be tied to monthly repayments in order to purchase a
new home as with a traditional mortgage or home equity loan/line of credit.
Reverse mortgages can be very complicated and expensive, so for
many they arenít the best borrowing option. In fact, you are required to
consult a U.S. Department of Housing and Urban Development (HUD)-approved
counselor before being allowed to apply.
A few common features of reverse mortgages:
* You must be at least
* The home (current or
future) must be your principal residence.
* You must own the home
outright or be able to pay it off with proceeds from the loan.
* The allowable loan
amount is based on your homeís appraised value, your age, current interest
rates, mortgage insurance and applicable fees. Generally, the older you are and
the more valuable your home, the greater the available loan.
* You neednít repay the
loan until you move out permanently, sell the property or die. Any money left
after the sale goes to you or your estate.
* The repayment amount
never exceeds the homeís final sale value, so you (or your heirs) are never
liable for more than you originally borrowed.
* Reverse mortgages have
no minimum income or credit score requirements.
* You can take the money
as a lump sum, a line of credit, fixed monthly payments or any combination.
* Itís not considered
taxable income so Social Security and Medicare benefits usually arenít
Observe these cautions, however:
* Reverse mortgages can
be expensive: An origination fee up to $6,000, initial insurance premium of 2
percent of the homeís value, a monthly insurance fee and other miscellaneous
charges may apply.
* They arenít
cost-effective if you plan to move in a few years.
* You are responsible
for homeownerís fees, property taxes, insurance and repairs. If you donít pay
them, you risk loan cancellation or foreclosure.
* The longer you carry a
reverse mortgage, the more it will decrease your home equity, and thus, your
estate. However, weigh that and living in your own home against the expense and
possible inconvenience of an assisted living facility.
AARPís comprehensive overview of reverse mortgages includes a free
online seminar and a loan calculator (www.aarp.org/money/revmort). HUD also
provides valuable information, including a search engine to find HUD-approved
housing counselors who can help you weigh the pros and cons for your particular