AMARILLO Home owners or their heirs could owe a lot of money and have little equity left when a reverse mortgage becomes due and payable, cautioned a Texas Cooperative Extension specialist.
“A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there,” said Andrew B. Crocker, Extension gerontology health specialist.
Other than equity in the home and a clear title, the only real qualification for a reverse mortgage is that the owner is age 62 or older, Crocker said.
However, he said, a reverse mortgage should not be entered into lightly. Careful consideration to other alternatives and advice from independent, outside counsel should be sought before making any decision about mortgages or equity.
“For many Americans, working toward owning their own home is the dream of a lifetime,” Crocker said. “Carefully consider all your options and make an informed decision, should you decide to take out a reverse mortgage on your home.”
With a reverse mortgage, the loan amount is determined by the value of the home and the equity in it, Crocker said.
There are three different reverse mortgage plans:
A single-purpose reverse mortgage is usually offered by government agencies and non-profit organizations. This type of plan has low up-front costs but is not available in all areas. Funds generated may only be used for a specified purpose, such as home repairs, property taxes or medical expenses.
Home Equity Conversion Mortgages are federally insured reverse mortgages, backed by the U.S. Department of Housing and Urban Development. These plans may be more expensive, but the money can be used for any purpose. However, a change in the home valuation at the end of the loan may leave the owner owing more money than the original amount.
Proprietary reverse mortgages are usually offered by private companies and may have higher total cost than the previous two. Since these loans are offered by private companies, terms vary from one company to the next.
Single-purpose reverse mortgages are usually only available to homeowners who meet income requirements, Crocker said. Proprietary reverse mortgages usually benefit those with higher value homes.
“Careful consideration and consultation with an independent credit counseling service may be necessary to make the decision that best suits your needs,” he said.
The cash from a reverse mortgage can be received as a single lump sum, a regular monthly cash advance or a line of credit, Crocker said. Typically, the plan has no monthly payments, and the balance of the loan is due when the homeowner dies, sells or permanently moves from the home.
“Depending on the terms of your loan agreement, your heirs may be responsible for this amount,” he said.
“Remember, a hallmark of the reverse mortgage is decreasing equity in your home and increasing debt to the lending institution,” he said. “In fact, the debt owed to the lending institution will draw interest at a rate that is usually determined by a market average. If you have the loan for a long time, or if your home’s value decreases, there may not be any equity left at the end of the loan.”
While some home values grow and the equity could increase over time, most home values do not grow at consistently high rates, Crocker said. That’s why the majority of reverse mortgages end up being “rising debt, falling equity” loans.
Anyone considering a reverse mortgage should get financial counseling, whether it is required or not, he advised. A list of government-approved counselors can be found at: www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm .
The Federal Trade Commission offers the following tips for those interested in a reverse mortgage:
Shop around and compare options;
Remember that all federally approved lenders must follow government rules, meaning that all fees, interest rates and other terms of the loan will be the same;
Be certain all the terms and conditions are understandable about what could make the loan due and payable;
Be cautious of any unsolicited reverse mortgage offers; and
Generally, three business days are allowed after signing the loan document to cancel it for any reason.
For more information, contact the FTC at http://www.ftc.gov or (877) 382-4357.