By Diana Palmieri
Commercial endorsements by veteran actors Henry Winkler (aka “the Fonz”) and Robert Wagner certainly make a reverse mortgage seem like a smooth, seamless process. For those over the age of 62, it might be. If you are considering this type of mortgage for your parents, or even yourself, there are several considerations.
A reverse mortgage allows seniors to access equity in their homes without credit or income requirements. Generally, the qualifications are as follows: The owner is at least 62 years old, the owner occupies the home, and there is a fairly low balance or no balance on the current mortgage. The homeowner is pretty much taking a loan out, except there are no repayments as long as the requirements are continually met. The amount you can borrow depends on age, the value of the home, current interest rates, and fees. The funds can be received as a monthly payment, a lump sum, or a combination of the two. Because the income from a reverse mortgage is considered a loan, the money is considered tax free. However, always consult a tax advisor for verification. There are also no known penalties relating to Social Security or Medicare. One thing to note: Because the payments are not due during the owner’s lifetime, the home will usually have to be sold after death OR if the borrower no longer meets the obligations of the mortgage. This is so the lender can recoup its investment. In addition, the mortgage cannot get “upside down,” so your heirs will not be personally liable for more than the home is sold for. Heirs can also receive the overage if the home is sold for more than the loan amount.
Now onto some of the cons. Upfront fees of a reverse mortgage can be costly, more so than a conventional mortgage. Lenders generally charge origination and closing costs, which can equal several percentage points of the home’s value. Medicaid and other need-based government assistance can also be affected by a reverse mortgage. Also consider that the loan balance obviously gets larger over time and that affects the inheritance that may be left to heirs. When the home is sold or no longer meets requirements, the cash interest and other finance charges must be repaid. However, all proceeds beyond those amounts can be passed to a spouse or estate. Borrowers are still responsible for property taxes, homeowner’s insurance, and mortgage insurance. Failure to make these payments could cause the loan to be due prematurely. There is also a mandatory debt counseling requirement to ensure the homeowner is fully informed about the decision. Some may consider this a waste of time; I don’t, and borrowers should know and fully understand what they are getting themselves into.
There is a provision that allows you to cancel the reverse mortgage if needed. It is called a three-day right of rescission. The process of canceling the loan should be explained at closing.
So, like anything else, considering a reverse mortgage will take time to understand and decide if this is the right thing for you. I do not think that a reverse mortgage is a no-brainer. You can go to http://www.consumer.ftc.gov/articles/0192-reverse-mortgages for more general information and links about reverse mortgages.
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