Reverse Mortgages

A reverse mortgage is a special type of home equity loan. This type of loan allows you to convert your equity in the household into cash while you still own the ownership rights to your home. The name comes from the fact that the lender actually pays you every month instead of you paying the lender. Most of these loans do not require you to repay the principal, interest, or any service fees as long as you still live in the home.

You are still responsible for PROPERTY, INSURANCE, and MAINTENANCE COSTS. The advantage for the lender is that when you die, your heirs must pay off the loan to retain title. Typically, heirs either use a regular mortgage or the proceeds from a sale to repay this loan.

Remember: The interest is compounded and increases the longer you are alive. This decreases the actual value of your estate upon your death. The loan is limited, however, to the value of your home. For example, if an individual is alive for one year after this loan begins, their ownership might be worth $125,000 after repaying the loan's principal. If, on the other hand, the individual remains alive for ten years, the estate might only be worth $50,000 after repaying the loan. This is the reason that the elderly are the most common people to use this type of loan. Interest upon this loan is also NOT TAX-DEDUCTIBLE. The proceeds also do not affect your social security payments or Medicare benefits. Check to make sure with your particular state legislation that this still holds!

There are three different types of reverse mortgages. The first is FHA-insured (The FHA is the Federal Housing Administration). Under this plan, closing costs, mortgage insurance, and a monthly servicing fee are included. The plan usually allows for changes in payment options (monthly loan advances, credit lines, or a fixed term monthly advance) at very little cost to the borrower. The main benefit is that the payments will continue even if the lender defaults.

The second type of reverse mortgage is a lender-insured loan. The payments are either calculated by a fixed or variable rate. The advances or line of credit is generally greater than FHA-insured plans however, they usually entail greater costs than FHA plans. Annuity payments in this plan DO AFFECT your social security and Medicare.

The final type is an uninsured loan. The only payment plan under this type of loan is loan advances for a fixed time period. Your balance is due when that time period has expired. Interest rates are usually fixed under this plan, as well. If you will not be able to pay the amount at the end of that time period, you could lose your house!