Resources: Newsletter Articles: Reverse Mortgage Overview

Reverse Mortgage Overview

Betty recently sold her house and found a new home that meets her current needs. She decided to pay cash for her home and, if the need arises for extra funds, to take out a home equity loan or a reverse mortgage. A reverse mortgage is an option for her because she is over 62 years of age and will use her new home as her principal residence.

How They Work

With a reverse mortgage you take equity out of your property in cash advances, creating debt against your home. It is the opposite of a regular mortgage. During a reverse mortgage, the lender sends you cash, and you make no repayments.

The amount you owe gets larger as you receive payments. As your debt grows your equity shrinks, unless your home's value is growing at a high rate. If you have a reverse mortgage for a long time, or if your home's value decreases, there may not be any remaining equity at the end of the loan. In short, a reverse mortgage is a "rising debt, falling equity" type of deal. This allows borrowers to "spend down" their home equity while they live in their homes, without having to make monthly loan repayments.

You can never owe more than your home's value at the time the loan is repaid, but it must be repaid in full - including all interest and other charges - when the last living borrower dies, sells the home, or permanently moves away.

Reverse mortgage borrowers continue to own their homes and are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in full.

What You Get and What You Pay

Reverse mortgages are most expensive in the early years of the loan, and become less costly over time. The lowest cost reverse mortgages are offered by state and local governments. These "public sector" loans generally must be used for specific purposes such as paying for home repairs or property taxes. Private sector reverse mortgages are offered by banks, mortgage companies, and savings associations, can be used for any purpose, and include a variety of costs which are added to your loan balance.

Tax Implications Reverse mortgages "may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner." If you receive SSI, Medicaid, or other public benefits with similar eligibility rules it is important to review your eligibility criteria for these programs.

Reverse mortgages are not for everyone, but they are a viable option for some equity-rich homeowners. A free Consumer's Guide to Reverse Mortgages (#D15601) can be requested from AARP, 800-424-3410.

Source: http://www.aarp.org/revmort

sherrybenninger@grubbco.com

The GRUBB Co., 1960 Mountain Blvd., Oakland, CA 94611

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