Reverse Mortgages

all at once, in a single lump sum of cash; as a regular monthly cash advance; as a "creditline" account that lets you decide when and how much of your available cash is paid to you; or as a combination of these payment methods.

No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

Other Home Loans
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. So you don't need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

With most home loans, you could lose your home if you don't make your monthly payments. But with a reverse mortgage, there aren't any monthly repayments to make. So you can't lose your home by not making them. Most reverse mortgages require no repayment for as long as you — or any co-owner(s) — live in the home. So they differ from other home loans in these important ways:

• you don't need an income to qualify for a reverse mortgage; and • you don't have to make monthly repayments on a reverse mortgage.

"Forward" Mortgages
You can see how a reverse mortgage works by comparing it to a "forward" mortgage — the kind you use to buy a home. Both types of mortgages create debt against your home. And both affect how much equity or ownership value you have in your home. But they do so in opposite ways.

"Debt" is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. "Home equity" means the value of your home (what it would sell for) minus any debt against it. For example, if your home is worth $150,000 and you still owe $30,000 on your mortgage, your home equity is $120,000.

Falling Debt, Rising Equity
When you purchased your home, you probably made a small down payment and borrowed the rest of the money you needed to buy it. Then you paid back your traditional "forward" mortgage loan every month over many years. During that time:

• your debt decreased; and • your home equity increased.

As you made each repayment, the amount you owed (your debt or "loan balance") grew smaller. But your ownership value (your "equity") grew larger. If you eventually made a final mortgage payment, you then owed nothing, and your home equity equaled the value of your home. In short, your forward mortgage was a "falling debt, rising equity" type of deal.

Rising Debt, Falling Equity
Reverse mortgages have a different purpose than forward mortgages do. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. So with a reverse mortgage:

• your debt increases; and • your home equity decreases.

It's just the opposite, or reverse, of a forward mortgage. With a reverse mortgage, the lender sends you cash, and you make no repayments. So the amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home's value is growing at a high rate.

Basic Features of Reverse Mortgages:

Although there are different types of reverse mortgages, all of them are similar in certain ways. Here are the features that most have in common.

Homeownership
With a reverse mortgage, you remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs.

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:

• The older you are, the more cash you can get; and • The more your home is worth, the more cash you can get.

The specific dollar amount available to you may also depend on interest rates and closing costs on home loans in your area.

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:

• pay off the old debt before you get a reverse mortgage; or • pay off the old debt with the money you get from a reverse mortgage.

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 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. Put another way, 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:

• fail to pay your property taxes; • fail to maintain and repair your home; or • fail to keep your home insured.

These are fairly standard "conditions of default" on any mortgage. On a reverse mortgage, however, lenders generally have the option to pay for these expenses by reducing your loan advances and using the difference to pay these obligations. This is only an option, however, if you have not already used up all your available loan funds.

Other default conditions on most home loans, including reverse mortgages, include:

• your declaration of bankruptcy; • your donation or abandonment of your home; • your perpetration of fraud or misrepresentation; • if a government agency needs your property for public use (for example, to build a highway); or • if a government agency condemns your property (for example, for health or safety reasons).

Changes that could affect the security of the loan for the lender can also make reverse mortgages payable. For example:

• renting out part or all of your home; • adding a new owner to your home's title; • changing your home's zoning classification; or • taking out new debt against your home.

You must read the loan documents carefully to make certain you understand all the conditions that can cause your loan to become due.

Federally Insured Reverse Mortgages:

Eligibility & Repayment
The Home Equity Conversion Mortgage (HECM) is the only reverse mortgage insured by the federal government. The Federal Housing Administration, (FHA), insures HECM loans, which is part of the U.S. Department of Housing and Urban Development (HUD).

The FHA tells HECM lenders how much they can lend you, based on your age and your home's value. The HECM program limits your loan costs, and the FHA guarantees that lenders will meet their obligations.


HECMs Versus Other Reverses

HECM loans generally provide the largest loan advances of any reverse mortgage. Often they provide a lot more cash than any other program. HECMs also give you the most choices in how you can have the cash paid to you.

The money you get from a HECM can be used for any purpose. Although they are not cheap, HECM loans can be much less costly than the other reverse mortgages that can be used for any purpose.

Who is Eligible

HECM loans are available in all 50 states, the District of Columbia, and Puerto Rico. (In Texas, however, HECM creditline options are not available.) To be eligible for a HECM loan:

• you, and any other current owners of your home, must be aged 62 or over, and live in your home as a principal residence; • your home must be a single-family residence in a 1- to 4-unit dwelling, a condominium, or part of a planned unit development (PUD). Some manufactured housing is eligible, but cooperatives and most mobile homes are not; • your home must be at least one year old and meet HUD's minimum property standards, but you can use the HECM to pay for repairs that may be required; and • you must discuss the program with a counselor from a HUD-approved counseling agency.

To learn more about reverse mortgages, visit http://www.aarp.org/money, http://www.reverse.org, or http://www.reversemortgage.org.