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Reverse Mortgages: An Overview
Reverse mortgages are a hot topic. You’ve seen the ads, you’ve heard the commercials, but you really don’t know much about them. This overview will present some of the basic facts, with sources for more complete information. What is a reverse mortgage?As the name implies, a reverse mortgage is the opposite of a forward, or regular, mortgage. When you initially buy a home, you generally make a small down payment and borrow the rest of the money you need to buy it. Then you make monthly payments over a period of many years to repay the loan. The equity in your home increases as the debt decreases. That’s a regular, or forward, mortgage. In a reverse mortgage, the opposite occurs. In this situation, you take your home’s equity out in cash, often over a period of years. The lender sends you cash and you make no repayments for as long as you live there. The loan must be repaid when you die, sell your home, or no longer live there as your principal residence. The amount you owe grows as the equity in your home shrinks. Reverse mortgages offer some older Americans a way to stay in their own homes while providing extra cash to supplement Social Security and other retirement income, pay unexpected medical expenses, or make home improvements. However, they shouldn’t be looked at as the primary basis for a sound retirement strategy. Explore other options and make the most of your mainstream retirement income sources: Social Security, pensions, other retirement savings plans, investment income, employment, etc. What are the eligibility requirements?To be eligible, you must be at least 62 years old and own your home. There are no income requirements. You retain the title to your home, so you’re still responsible for paying the property taxes and homeowner insurance and for making property repairs. How much can I borrow? The amount you can borrow depends on your age, the current interest rate, other loan fees, and the appraised value of your home. Generally, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. How do I receive my payments? You have several choices. You can choose to receive equal monthly cash payments for a specific period or for as long as you live in your home. Or, you can opt for a line of credit that allows you to draw on the loan proceeds at any time in amounts of your choosing. You can also get a combination of line of credit plus monthly payments. How do I repay the reverse mortgage? As long as you continue to live in your home, no repayments are due. All reverse mortgages become due and payable when you die, sell your home, or permanently move out of the home. There are other conditions that could cause your loan to become due and payable, so be sure to read the fine print carefully. Most reputable lenders want repayment, not your house. The debt you owe is equal to all the loan advances you receive plus all the interest that is added to the loan balance. If that amount is less than what your home is worth when you pay back the loan, you get to keep what’s left over. However, if the loan balance equals 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. What kinds of reverse mortgages are available?There are different types of reverse mortgages with different costs, rules, restrictions, and eligibility requirements. Check with your state housing finance agency to see what’s available in your area. One type of reverse mortgage, Home Equity Conversion Mortgages (HECMs), are available in all 50 states, and are the only reverse mortgage insured by the U.S. Department of Housing and Urban Development (HUD). To be eligible for a HECM loan, you must discuss it first with a HUD-approved counselor. This free counseling can be very helpful, even if you were considering a different type of reverse mortgage. Call 800-569-4287 to find the HUD-approved counseling agency nearest you. Where can I get more information?AARP offers an independent, comprehensive look at the entire reverse mortgage issue beginning at www.aarp.org/revmort. For additional details, background information, or supplementary materials, go to www.reverse.org, a website provided by the National Center for Home Equity Conversion Mortgage (NCHEC), a nonprofit organization with no ties to the reverse mortgage lending industry. This is not a decision to be entered into lightly, so do your homework first. Prudential Retirement is not responsible for the information contained in the listed websites, and makes not representation about the information contained therein. The sites are provided to you for information purposes only. |
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