Types of Reverse Mortgages - How to Qualify and Things to Look Out For When Shopping for a Reverse Mortgage

March 21st 2006

Cash Poor & Equity Rich

Many older Americans over the age of 62 may find themselves in a position of cash-poor while sitting on a large sum of equity. Reverse Mortgages are one option for paying off medical bills, supplementing income, or a method of making retirement more enjoyable with travel. Whatever the reason for considering a reverse mortgage, we have learned that there are a few things to consider before signing on the dotted line.

There are three types of reverse mortgages. The first is a single-purpose reverse mortgage which may be offered by some state and local government agencies and nonprofit organizations. The loans usually have a very low cost, but they are not available everywhere. The barrower may need to be low to moderate income and have a specific use intended for the funds such as home improvement, property taxes, or health expenses.

The second type of reverse mortgage is the Home Equity Conversion Mortgages (HECM). These mortgages are backed by the U. S. Department of Housing and Urban Development (HUD). You must meet with a counselor from an independent government-approved housing counseling agency first.

If you plan on staying in your home for a very short time, the HECM loans can be expensive because of up-front. These loans are widely available, and there are no income of medical requirements.

The third type of reverse mortgage is the proprietary reverse mortgages, which are private loans that are only backed by the companies that develop them. Like all of the other reverse mortgages, you must live in your own home, and the loans are generally tax-free.

These reverse mortgages usually don’t affect Social Security or Medicare benefits. Check with your advisor about this before making any decision. You can also remain living in the home, retain title and do not have to pay back the loan until the last surviving borrower dies, sells the home or no longer lives in the home as a principal residence.

With the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable. Also, beware that interest accrues on the loan funds advanced to the barrower. Make sure that the loan includes a “nonrecourse” clause that will prevent either the borrower or the estate of the barrower from owing more money than the house is worth.

Many lenders charge origination fees and other closing costs for a reverse mortgage. There may also be a service fee over over term of the mortgage. The interest rates may either be fixed or variable, and since the barrower retains title, the borrower is responsible for the property taxes. If the taxes or homeowners insurance is not paid the loan may become due and payable.

Always shop around for the best deal. You should always consider selling your home before taking on a reverse mortgage. Weigh all of your options after you determine what your home is worth.