Senior
citizens who own their homes outright but lack sufficient income to meet their
immediate financial needs may want to consider a reverse mortgage. A reverse
mortgage enables you to convert equity in your home into spendable income without
having to move or sell your home.
The
amount you receive from a reverse mortgage is based on the appraised value of
the property. The amount of the monthly payment you receive depends on your
age and life expectancy and the term of the loan.
Unlike
a conventional mortgage, your income has no bearing on eligibility for a reverse
mortgage. With a reverse mortgage, no repayment is required to the lender until
you sell the home or no longer use it for a primary residence. Then, you or
your estate must repay the loan with interest and any applicable finance charges.
Any proceeds beyond what is owed belong to you or your estate.
The
commitment to a reverse mortgage should not be made without professional advice
aimed at weighing all of the legal ramifications of the decision. For example,
if you receive, or expect to receive, needs‑based benefits, it will be
important to understand whether and how receiving the proceeds from a reverse
mortgage may affect eligibility for a range of benefits, such as Social Security,
food stamps, VA benefits, state welfare programs, energy assistance, and property
tax postponement for senior citizens.
Another
important consequence of a reverse mortgage is its future effects on your heirs.
The flow of cash without an immediate need for repayment should not obscure
the fact that a reverse mortgage, like any loan, has a day of reckoning. A substantial
mortgage on your home could eventually exhaust what originally was contemplated
as the primary asset in your estate. This remains your choice legally, but involvement
of family members in the decisionmaking process is prudent. This will allow
you and your family to consider all alternatives to attain the same goals and
to reduce the likelihood that an heir might later challenge the transaction.
Earlier this year, the federal Department of Housing
and Urban Development (HUD) issued a final rule implementing measures to tighten
limits on fees charged for reverse mortgages under HUD's Home Equity Conversion
Mortgage Program. The rule is intended to protect homeowners in reverse mortgage
loan programs from paying excessive fees to third parties for services that
are of little or no value. The rule requires that a reverse mortgage be executed
by a borrower who has received complete disclosure of all costs, including specifications
as to which charges are required to obtain the reverse mortgage and which are
not. The reverse mortgage also must be made with HUD‑approved restrictions
that will prevent the borrower from paying for any unnecessary or excessive
costs.
