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January 2008

Reverse Mortgages—Are They for You?

Recently, electric cooperative directors asked me to write about reverse mortgages as an option for senior citizens who are looking to gain cash for current expenses.

What is a reverse mortgage? This is a type of loan where the lender gives you either a lump sum, a monthly advance, a line of credit, or all three together while you still live in your home. This allows you to use built-up home equity, tax-free, for living expenses. It’s available to seniors who are 62 or older and have paid off most or all of a current home mortgage.

Reverse mortgages can be beneficial if you need cash and your home is your primary asset. However, before deciding on a reverse mortgage loan, you should know how much cash you could get by selling your current home, how much it would cost to buy a new home, how much it could cost to maintain a new home, how much less the new home would cost than your current home, and whether you have other alternatives such as renting an apartment. You will also want to consult your attorney and financial advisor to determine tax consequences of any plan you consider.

You must maintain your home and pay all real estate taxes during the course of the loan. In most cases, the reverse mortgage becomes due with interest when you move, sell your home, reach the end of the loan period, or die. When you die, the lender does not take title to your home. Rather, your heirs are required to pay off or refinance the loan.

What should you consider when thinking about a reverse mortgage loan? First, a reverse mortgage uses up some or all of equity in your home, leaving fewer assets for you and your heirs.

Second, remember that a reverse mortgage loan increases its balances over the life of the loan. The interest is added to the principal loan balance each month, so the amount you owe increases over time.

Third, pay close attention to whether the mortgage interest is fixed-rate or adjustable. Some adjustable loans can accelerate the interest rate quickly after an initial “teaser rate” period.

Fourth, reverse mortgage loans typically include loan origination fees and closing costs and may also include servicing fees. Moreover, insured plans may include insurance premiums. These costs can add up quickly. The federal Truth in Lending Act requires lenders to disclose these costs in advance. If this is not done, walk away and do not sign any documents.

Fifth, your legal obligation to repay the loan is limited by the value of the home at the time the loan is repaid. This could include any appreciation after your loan begins.

Finally, you should consider calling the U.S. Department of Housing and Urban Development tollfree at 1-800-569-4287 to obtain the name of a department-approved reverse mortgage counselor. 

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