What You Need to Know About Reverse Mortgages
Although introduced in the late 80’s, Reverse Mortgages are now becoming more popular. Reverse Mortgages are designed for retirement age consumers, to convert the equity in their homes for home improvement, pay bills or simply to use the funds to live on.
Reverse mortgages offer special appeal to older adults because the loan advances, which are not taxable, generally do not affect Social Security or Medicare benefits. Depending on the plan, reverse mortgages generally allow homeowners to retain title to their homes until they permanently move, sell their home, die, or reach the end of a pre-selected loan term. Generally, a move is considered permanent when the homeowner has not lived in the home for 12 consecutive months. So, for example, a person could live in a nursing home or other medical facility for up to 12 months before the reverse mortgage would be due.
Reverse mortgages tend to be more costly than traditional loans because they are rising-debt loans. The interest is added to the principal loan balance each month. So, the total amount of interest owed increases significantly with time as the interest compounds. Reverse mortgages use up all or some of the equity in a home. That leaves fewer assets for the homeowner and his or her heirs.
Lenders generally charge origination fees and closing costs; some charge servicing fees. How much is up to the lender. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole. Because homeowners retain title to their home, they remain responsible for taxes, insurance, fuel, maintenance, and other housing expenses.
If you decide to consider a reverse mortgage, shop around and compare terms. Look at the:
- Annual percentage rate (APR), which is the yearly cost of credit.
- Type of interest rate. Some plans provide for fixed rate interest; others involve adjustable rates that change over the loan term based on market conditions.
- Number of points (fees paid to the lender for the loan) and other closing costs. Some lenders may charge steep costs, which your lender may offer to finance. However, if you agree to this, you'll take out fewer proceeds from the loan or you'll borrow an extra amount, which will be added to your loan balance and you'll owe more interest at the end of the loan.
- Total amount loan cost (TALC) rates. The TALC rate is the projected annual average cost of a reverse mortgage, including all itemized costs. It shows what the single all-inclusive interest rate would be if the lender could charge only interest and no fees or other costs.
- Payment terms, including acceleration clauses. They state when the lender can declare the entire loan due.
Reverse mortgages come with different provisions. For example, with some reverse mortgages, the lender may take a share of equity appreciation. This could create issues for the homeowner or heirs, particularly if the value of the home rises unexpectedly during the loan. Carefully read any provision of the contract about shared appreciation.
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