Homemade Money: A Consumer's Guide to Reverse Mortgages

By: Source: AARP.org Date Posted: 2003-06-19 12:38:00-04:00

Session 4 - Analyzing Reverse Mortgages

While there are different types of reverse mortgages, all of them are similar in certain ways. Here's a look at what the loans have in common.

It's still your home

With a reverse mortgage, you remain the owner of your home, just as you were when you took out a traditional forward-paying mortgage. This means that you continue to be responsible for paying your property taxes and homeowner's insurance, and for making property repairs. If for some reason you fail to carry out these responsibilities, your loan could become due and payable in full. When the loan becomes due, you or your heirs must repay all your cash advances and the interest that's been charged on them. After all, reputable lenders don't want your house—they want their loans repaid.

Paying fees

The money that you get from your reverse mortgage can be used to pay the various fees that are charged on the loan. The costs are added to your loan balance, and you pay them back with interest when the loan is over.

Loan Calculator

See how much "homemade" money you can get. This calculator provides estimates for two nationally available reverse mortgage programs.

Loan amounts

As discussed in session 2, the amount of money you can get from a reverse mortgage depends most on the specific program or plan you select, as well as the kind of cash advances you choose. Some reverse mortgages cost a lot more than others, reducing the amount of cash you can get from them. The general rule within most programs, though, is that the older you are and the more your home is worth, the more cash you can get. The specific dollar amount available to you may also depend on interest rates and closing costs on home loans in your area. Finally, if you select a single-purpose loan in order to finance home repairs or to pay property taxes, the loan amount is generally limited by the actual cost of the single purpose.

Goodbye to other debt

Reverse mortgages generally must be "first" mortgages, meaning that there can be no other debt against your home. If you currently owe any money on your property, most likely you must do one of two things:

pay off the debt before you get a reverse mortgage, or
pay off the debt with the money you get from a reverse mortgage.

Most reverse mortgage borrowers choose the second option. In some cases you may not have to pay off an earlier debt against your home. Some lenders—generally only state and local government agencies—agree to wait to be repaid until after another reverse mortgage is repaid.

Reverse debt

The debt you owe on a reverse mortgage equals all of the loan advances you receive (including any used to finance loan costs or pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.

If your loan balance exceeds the value of your home at the time the loan becomes due, you (or your estate) are NOT responsible for making up the difference. In other words, you can never owe more than what your home is worth at the time the loan is repaid.

Called a "non-recourse" limit, this overall cap on your loan balance means that the lender, when seeking repayment of your loan, does not have legal recourse to anything other than your home's value. The lender may not seek repayment from your income, your other assets or your heirs.

An important safeguard

The non-recourse limit protects borrowers and their heirs against ever owing more than the value of their homes. Keep in mind though, the non-recourse limit is more important on some loans than others.

If you take out a public sector loan—a low-cost loan made by a state or local government and earmarked for a specific use—the balance of the loan is unlikely to ever equal the value of your home. But on private sector loans, which cost more and can be used for any purpose, rising loan balances are more likely to catch up to your home's value.

The Home Equity Conversion Mortgage (HECM) insurance program tells lenders how much they can lend based on a borrower's age and home value. Administered by the Federal Housing Administration (FHA), the HECM program guarantees that borrowers will receive their promised loan advances

no matter how long they live in their homes;
no matter what happens to the value of their homes;
no matter what happens to the lenders from whom they get their reverse mortgages.

Payback time

Reverse mortgages become due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. Note: typically, a "permanent move" means that neither you nor any other co-borrower has lived in your home for one continuous year. Reverse mortgage lenders can also require repayment at any time if you fail to meet certain borrower obligations, including

failure to pay your property taxes;
failure to maintain and repair your home; or
failure to keep your home insured.

These "conditions of default" are fairly standard on all kinds of mortgages. Reverse mortgage lenders also have the option of reducing your loan advances and using the difference to pay the obligations listed above. This is not an option if you have already used up all of your available loan funds.

In addition to these standard default conditions, reverse mortgage lenders may also require payment at any time if

you declare bankruptcy;
you donate or abandon your home;
you perpetrate fraud or misrepresentation; or
your home is involved in eminent domain or condemnation proceedings.

A reverse mortgage may also include acceleration clauses that make it due and payable. Generally, these clauses relate to changes that could affect the security of the loan for the lender. Some examples of changes that may trigger an acceleration clause include

renting out all or part of your home to someone else;
adding a new owner to your home ' s title;
changing the use of your home from residential to commercial or light manufacturing; or
taking out new debt against your home.

Calling it off

After closing a reverse mortgage, you have three business days to reconsider your decision. (Note: "business days" include Saturdays, but not Sundays or legal public holidays.) If for any reason during this time you decide you don't want the loan, you can cancel it. But you must do this within three business days after closing. If you decide to exercise this "right of recission," you must do so in writing, using the form provided by the lender at closing, or by letter, fax or telegram. It must be hand delivered, mailed, faxed or filed with a telegraph company before midnight on the third business day. You cannot rescind orally, by telephone or in person. You must rescind in writing.

Thinking Points

In what ways do reverse mortgages differ from traditional, " forward " mortgages?
What are some of the similarities among reverse mortgage plans and programs?

Glossary

Loan balance: The amount owed, including principal and interest.

Non-recourse limit: An overall cap or limit on your loan balance. It means that the lender does not have legal recourse to anything other than your home's value. The lender may not seek repayment from your income, your other assets or your heirs.

Federal Housing Administration (FHA): The part of the US Department of Housing and Urban Development (HUD) that insures HECM loans.

Acceleration clauses: The part of a contract that defines when a loan may be declared due and payable.