What You Need to Know About Reverse Mortgages

By Teresa Ambord

You’ve heard of reverse mortgages. Maybe you are considering one but you have questions. Reverse mortgages can be wonderful for some people who are house-rich but cash-poor. But they are not for everyone, and you should check carefully before deciding to initiate a reverse mortgage.

Here is some basic information that may help you make your decision:

First, you must be at least 62 years old.
The mortgage is only available on your principal residence.
Your home must be in good repair.
You must own your home outright, or have a small balance that can be paid out of the proceeds of the loan.
You make no payments on the loan. It is repaid from your home equity at the time the home is sold, the owner passes away or permanently moves, or in some cases, at the end of the loan term. Remaining equity goes to you or your heirs.
You are considered to have “permanently moved” when you have not lived in your home for 12 consecutive months. This includes long-term hospitalization or a lengthy stay in a nursing home. So an 11 month stay in a nursing home would not qualify as a permanent move.
Although you make no loan payments, you still must maintain the insurance and property taxes.
Reverse mortgages are available on most homes, but not on mobile homes or co-ops.
There are no income or medical requirements to meet.
Payments are tax-free, since they are not regarded as income, but as a return of your principal.
Payments are not used to calculate whether your Social Security is taxable.
Reverse mortgages are “non-recourse.” This means that you can never owe more than the selling price of your home. In the event the loan does exceed the selling price, the lender or the government fills the gap.
Reverse mortgages are “rising-debt loans” which means that interest is added to the principal each month. This interest is not tax-deductible however, until you pay off all or part of the loan.

The loan amount is generally based on:

the value of your home
current interest rates
your geographic location
your age
and the type of reverse mortgage you choose.

You can arrange to receive payments in several ways:

Line of credit: payments made at times and amounts of the borrower’s choosing, up to a maximum amount.
Term: equal monthly payments for a fixed number of months.
Modified term: combination of a line of credit with monthly payments for a given number of months.
Modified tenure: combination of a line of credit with monthly payments, while the borrower lives in the home.
Tenure: equal monthly payments, provided at least one of the borrowers on the loan occupies the home as the principal residence.

Here are the basic types of reverse mortgages:

those offered by private lenders such as banks and mortgage companies. They are called proprietary reverse mortgages.
single-purpose reverse mortgages, offered by state or local governments for specific reasons
Home Equity Conversion Mortgages (HECM) which are federally insured through the Federal Housing Administration and administered by HUD (Housing and Urban Development). HECMs are generally less expensive than private lender reverse mortgages.

To qualify for an HECM:

your home must be at least one year old
your home must meet HUD’s minimum repair standards, though you can use the loan funds to make repairs
and you must meet with a HUD counselor

Two points of caution:

Beware of lenders that solicit your business, especially door-to-door. There have been reports of problems with such lenders involving steep costs to the homeowner.
Generally, you may cancel a reverse mortgage contract within three business days after signing, provided your cancellation is in writing.

If you have reason to suspect that your lender is using questionable practices, contact your state Attorney General or state banking regulatory agency. Or file a complaint online with the Federal Trade Commission by calling toll-free at 1-877-FTC-HELP, or by logging onto: