Raising Money With Reverse Mortgages
Many seniors have lots of equity in their homes but a limited cash flow to provide for their golden years.
That's why some are turning to reverse mortgages, where banks pay you to live in your own home.
But the reverse mortgage option isn't right for everyone.
Vera Gibbons from Kiplinger's Personal Finance magazine visited The Early Show to help clear up some questions.
As
, "It's like a regular mortgage but it works in reverse: Rather than you paying the lender, the lender is paying you."She says there are several types of homeowners who might be interested in these mortgages.
The first is what she calls the need-based candidate — "Someone who needs this money for a medical emergency or some other type of emergency."
Another is "the financial planner type." Gibbons said this person is, "Someone who might want to use this rather than dip into their retirement funds."
And then there is "someone who is just looking to live, to enhance their lifestyle. To play a lot of golf, to fund their retirement, to take vacations."
Gibbons says the cost of reverse mortgages often is the biggest turn-off.
"That would be the No. 1 objection people have to reverse mortgages," she told co-anchor Rene Syler.. "You've got the lender origination fee, which is 2 percent of the loan amount, you've got the mortgage insurance premium, another 2 percent.
"If you look at these two costs combined, it could be like, $5,000, $10,000, $12,000 right off the top." Plus there are the standard closing costs.
Homeownership
The loans are for people 62 and over, and there are basic features that most reverse mortgages have in common:
With a reverse mortgage, you remain the owner of your home just like when you had a conventional mortgage. You are still responsible for paying your property taxes and homeowners insurance and for making repairs to your property.
When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don't want your house; they want repayment.
Financing fees
You can use the money you get from a reverse mortgage to pay the various fees that are charged on the loan. This is called "financing" the loan costs. The costs are added to your loan balance, and you pay them back, plus interest, when the loan is over.
Loan amounts
The amount of money you can get depends most on the specific reverse mortgage plan or program you select. It also depends on the kind of cash advances you choose. Some reverse mortgages cost a lot more than others, and this reduces the amount of cash you can get from them.
Within each loan program, the amounts you can get generally depend on your age and your home's value:
Debt payoff
Reverse mortgages generally must be "first" mortgages; that is, they must be the primary debt against your home. So if you now owe any money on your property, you generally must either :
Most reverse mortgage borrowers pay off any home debt with a lump sum advance from their reverse mortgage. You may not have to pay off other debt against your home if the prior lender agrees to be repaid after the reverse mortgage is repaid. Generally only state or local government lending agencies are willing to consider "subordinating" their loans in this way.
Debt limit
The debt you owe on a reverse mortgage equals all of the loan advances you receive (including any you used to finance the loan or to pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.
But if your rising loan balance ever grows to equal the value of your home, then your total debt is limited by the value of your home. In other words, you can never owe more than what your home is worth at the time the loan is repaid. The lender may not seek repayment from your income, your other assets, or from your heirs.
Repayment
All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a "permanent move" means that neither you nor any other co-borrower has lived in your home for one continuous year.)
Reverse mortgage lenders can also require repayment at any time if you:
Cancellation
After closing a reverse mortgage, you have three days to reconsider your decision. If for any reason you decide you do not want the loan, you can cancel it. But you must do this within three business days after closing.
There is more help on the Web. For more information on reverse mortgages, check out Reversemortgage.Org or the government's HUD Web site.