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July 5th, 2013 by Crown Financial
A reverse mortgage (or home equity conversion, as it is sometimes called) involves selling the equity in a home while retaining the right to live in that home until death (a life estate). It turns a home’s equity into regular cash payments. However, there are age restrictions on this procedure, as well as other disadvantages that might outweigh the benefits for some people.
We suggest that you seek legal counsel when pursuing such a plan.
What is a reverse mortgage?
To qualify for a reverse mortgage, you must own your home, occupy the home as a principal residence for more than six months out of a year, and be at least 62 years of age. If you have any debt against the home, you must either pay it off before getting a reverse mortgage or use an immediate cash advance from the reverse mortgage loan to pay it off.
The reverse mortgage funds may be paid to you in a lump sum, in monthly advances, through a line of credit, or in a combination of the three. The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging. The greatest cash amounts generally go to the oldest borrowers living in the homes of greatest value on loans with the lowest costs.
Because you retain title to your home, you also remain responsible for taxes, repairs, and maintenance. Failure to carry out these responsibilities could result in the loan becoming due and payable in full. Depending on the plan that you select, although you generally are not required to repay the loan as long as you live in the home, it becomes due with interest when you permanently move, sell your home, die, or reach the end of the preselected loan term. The lender does not take the title to your home when you die, but your heirs must pay off the loan. The debt is usually repaid by refinancing the loan into a forward mortgage, if the heirs are eligible, or by using the proceeds from the sale of your home.
There are three reverse mortgage plans available: FHA-insured, lender-insured, and uninsured. All three plans are rising-debt loans. This means that the interest is added to the principal loan balance each month, resulting in a significant increase over time, in the amount of interest you will owe. All three plans charge loan origination fees and closing costs, the legal obligation to pay back the loan is limited by the value of the home at the time the loan is repaid, the loan is nontaxable, and in neither plan will Social Security or Medicare benefits be affected, although eligibility in Supplemental Security Income could be put at risk.
What you have to pay
The best way to compare the cost of reverse mortgages is to use the Total Annual Loan Cost (TALC) rates that the federal Truth-In-Lending law (Regulation Z) requires lenders to disclose to you. TALC rates are generally greatest in the first five years of a reverse mortgage and grow smaller over time. They can be especially high in the first years of a loan if you select monthly advances or use a small part of a credit line. Ask for TALC rates early in your decision making, and before you sign a contract check the repayment conditions to be sure you understand all the reasons for any cost differences.
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