A reader: My husband and I are in our early 70’s. We both recently retired. We are comfortable financially but are considering a reverse mortgage. We keep hearing about them and we have a couple of friends that are doing it and they are having a blast using the income to travel. I even saw a television commercial with one of my favorite actors talking about how great reverse mortgages were for people who wanted to really enjoy their retirement. We have a lot of equity in our home and this seems like a way to get some use out of it without paying interest on a loan. Do you have any suggestions about where we can find reliable information?
Action Line: Congratulations on your retirement and your plans to make the most of your new leisure time.
According to the Federal Trade Commission (FTC), if you’re 62 or older – and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses – a reverse mortgage might be an option for you. It’s a product that allows you to convert the equity in your home into cash without having to sell your home or pay additional monthly bills.
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In a “regular” mortgage, you make monthly payments to the lender. In a “reverse” mortgage, you receive money from the lender, and generally don’t have to pay it back for as long as you live in your home. The loan is repaid when you die; sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions. You can learn more at www.ftc.gov.
But it is important to remember that there is interest charged on a reverse mortgage. The loan must be repaid in full, including all interest and other charges, when the last living borrower dies, sells the home, or permanently moves away. Because you make no monthly payments, the amount owed grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your “equity”) generally grows smaller. But you can never owe more than your home’s value at the time the loan is repaid. Reverse mortgage borrowers continue to own their homes. So, they are still responsible for property taxes, insurance, and repairs. If a borrower fails to carry out these responsibilities, the loan could become due and payable in full.
There are no minimum income or credit requirements because no payments are required on the mortgage. The proceeds from the loan may be used at the discretion of the borrower. While credit is not part of the qualification process a current or pending bankruptcy will require court approval prior to closing. Reverse mortgages follow FHA standards for property types, meaning most 1-4 family dwellings, FHA-approved condominiums and planned unit developments will qualify. Manufactured housing qualifies based on standard FHA guidelines.
The American Association of Retired People (AARP) website, www.aarp.org/, has several articles about reverse mortgages including recent changes in how the loans are administered.
One final reminder: your favorite actor is being well-paid to convince you to take out a reverse mortgage. Take the time to check with the BBB to find a reliable financial institution and explore all your options before making any decisions about your home.
Action Line is written by Blair Looney, president and CEO for the Better Business Bureau serving Central California. Send your consumer concerns, questions and problems to Action Line at the Better Business Bureau, 2600 W. Shaw Lane, Fresno, CA 93711 or firstname.lastname@example.org.