Sandra Block
October 16, 2001
Declining interest rates have hammered the income generated from money market funds and bank CDs that many senior citizens depend on. And the bear market has pulverized investment portfolios. Some retirees are afraid they won't be able to pay their bills.
Many seniors continue to retain one valuable asset: their home. A growing number are using reverse mortgages to turn those homes into a regular source of income. A reverse mortgage is a loan against your home that doesn't have to be repaid until you move, sell the house or die.
Home-equity conversion loans, the most popular type of reverse mortgages, are expected to reach 10,000 this year. That's up more than 50% from 2000, although an administrative glitch involving Federal Housing Administration insurance reduced last year's total.
Greater awareness of the product and falling interest rates have contributed to record demand, says Peter Bell, president of the National Reverse Mortgage Lenders Association.
Reverse mortgages are complicated, and they're not for everyone. But if you're at lease 62 years old and you need extra income, they're worth a look. You can use a reverse mortgage for a one-time project, such as a new roof, or for ongoing income.
Some important things to know:
- You don't have to repay the loan until you sell your home or die. The amount you can borrow is based on several factors: how much equity you have in your home, your home's value, current interest rates and your age. Unlike traditional mortgages, which decline as you pay on the loan, reverse mortgages rise over time as interest on the loan accrues.
- You can choose how to receive the money: in a lump sum, a monthly payment or a line of credit. The line of credit* is the most popular choice because like a home-equity line, you can tap it when you need money.
- If you reside in the house until you die, your heirs will have several options. They can sell the house and use the proceeds to pay off the loan. If they want to keep the house, they can get a new mortgage and use the money to pay off the lender, or use other sources of funds to pay off the loan.
- The lender won't foreclose unless the estate fails to repay the loan, Bell says. Still, if your heart is set on leaving your home to your children, you may want to explore other sources of income, says Katrina Jones, director of product development for Fannie Mae.
- The loan repayment amount will never exceed the value of your home at the time the loan is repaid. For example, if you arrange to receive monthly payments and live to be 105, your lender can't go after your heirs for the difference between your home value and the loan amount.
- Payments from a reverse mortgage aren't taxable. However, you can't deduct the interest until the debt is repaid.
- You must continue to pay property taxes and insurance, and you're responsible for maintaining your home. If you fail to meet those responsibilities, your lender may demand repayment.
- Like a home refinancing, reverse mortgages have closing costs and other fees. However, you can usually use your loan proceeds to pay those expenses. "The only out-of-pocket cash some lenders may require is a couple of hundred dollars for an appraisal," Bell says.
Because closing costs are typically spread out over the life of the loan, reverse mortgages are best suited for homeowners who plan to be in their homes for several years, Jones says. If you're contemplating selling your house next year, for example, a reverse mortgage may not be a good idea.
Finding a lender
If you're interested in getting a reverse mortgage, make sure you deal with a reputable lender. Reverse mortgage lenders are required to comply with the federal Truth in Lending Act, which means they must disclose loan terms, the annual percentage rate, costs and payment requirements.