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Consumer News

Reverse Mortgages 

Cashing In On Home Ownership

Many consumers age 62 or older are house-rich and cash-poortheir mortgages are

paid off, but they are living on fixed or limited incomes. A reverse mortgage may

allow some consumers to take advantage of their home as a valuable asset and convert

it to a source of income without losing home ownership.

How Reverse Mortgages Work

A reverse mortgage is a loan: where the lender pays youin a lump sum, a monthly

advance, a line of credit, or a combination of all threewhile you continue to live in

your home. To qualify for a reverse mortgage, you must own your home. The amount

you are eligible to borrow generally is based on your age, the equity in your home, and

the interest rate the lender is charging. Funds you receive from a reverse mortgage may

be used for any purpose.

With a reverse mortgage, you retain title to your home. You are responsible for maintaining your home and paying all real estate taxes. Depending on the plan you select,

your reverse mortgage becomes due with interest when you move, sell your home,

reach the end of a pre-selected loan period, or die. When you die, the lender does not

take title to your home, but your heirs must pay off the loan. Usually, the debt is repaid

by selling the home or refinancing the property.

Facts to Consider about Reverse Mortgages

 Reverse mortgages are rising-debt loans. The interest is added to the principal loan

balance each month, because it is not paid on a current basis. The amount you owe

increases over time as the interest compounds. Some reverse mortgages have fixedrate interest; others have adjustable rates that can change over the lifetime of the

loan.

 Reverse mortgages use up some or all the equity in your home, leaving fewer assets

for you and your heirs.

September 1998
 The three types of reverse mortgagesFHA-insured, lender-insured, and uninsured

vary according to their costs and terms. Check the features of each to select the

type that is best-suited for your needs. Before considering any reverse mortgage,

consult with family members, your attorney, or financial advisor.

 Reverse mortgages typically charge loan-origination fees and closing costs. Insured

plans charge insurance premiums; some plans have mortgage servicing fees. You

may be able to finance these costs if you want to avoid paying them in cash. But, if

you finance the costs, they will be added to your loan amount and you will pay

interest on them.

 Your legal obligation to repay the loan is limited by the value of your home at the

time the loan is repaid. This could include any appreciation in the value of your

home after your loan begins.

 There are various reverse mortgage plans offered today. Consult your attorney or

financial advisor about the tax consequences of the particular plan you are

considering.

Reverse Mortgage Safeguards

The federal Truth in Lending Act (TILA) is one of the best protections you have with a

reverse mortgage. TILA requires lenders to disclose the costs and terms of reverse

mortgages. This includes the Annual Percentage Rate (APR) and payment terms. If you

choose a credit line as your loan advance, lenders also must tell you of charges related

to opening and using your credit account.

Resources

For more information about reverse mortgages, contact the Home Equity Information

Center of the American Association of Retired Persons (AARP), 601 E Street, NW,

Washington, DC 20049.

You also can visit the FTC at www.ftc.govclick on Consumer Protection and

Publications.