An Introduction to Reverse Mortgages
prepared by MetLife Bank, N.A.
For some homeowners age 62 or older, a reverse mortgage can be a helpful financial tool. It provides a way to tap in to your home equity to receive cash for what you want or need while you still live in and own your home.
A reverse mortgage is not right for everyone. Your age, the value of your home, and your estate plans are among the factors that can help determine if a reverse mortgage will be advantageous to you.
This article outlines the key facts about reverse mortgages and provides a good starting point for your investigation into this type of loan.
A reverse mortgage is a loan secured by your home that gives you cash now in exchange for your obligation to repay the loan in the future. It allows you to tap into the equity you've built up in your home over the years and receive cash to use as you choose. Through the life of your reverse mortgage, you continue to own and live in your home. To be eligible for a reverse mortgage, all of the homeowners must be age 62 or older.
Use of Proceeds
How you choose to use your reverse mortgage proceeds is up to you. For many, it's a source of income to cover monthly expenses. For others, it provides peace of mind for future needs. Generally, it is not advisable to use reverse mortgage proceeds to make a financial investment since the costs of the loan may exceed the investment return. Metropolitan Life Insurance Company and its insurance company and broker-dealer affiliates ("MetLife") do not recommend or encourage the use of reverse mortgage proceeds to fund new or existing investment or annuity products. These products include stocks, bonds, mutual funds, deferred or immediate annuities, fixed or variable annuities, and variable life insurance. Generally, MetLife views the funding of such products with reverse mortgage proceeds as inappropriate and inconsistent with the purpose of a reverse mortgage. Finally, MetLife specifically prohibits its sales representatives from recommending, encouraging, or inducing you to use reverse mortgage proceeds to fund an investment or annuity product as outlined above.
Impact on your government benefits
Funds from a reverse mortgage generally do not affect regular Social Security or Medicare benefits. However, needs-based benefits, such as Medicaid and Supplemental Security Income (SSI), may be impacted. Contact a tax professional about your particular situation.
Impact on your home equity
Interest and administrative charges are added to the loan balance during the period of the loan. Over time, the equity that you have in your home is reduced and the debt balance you owe grows exactly the reverse of a traditional mortgage.
Repaying the loan
Unlike a home equity loan or traditional mortgage, with a reverse mortgage, there are no monthly payments. The loan becomes due when you sell the home, move out, vacate for a period of 12 months, or when all of the homeowners are deceased. At that time, the loan principal, interest charges, and any fees must be paid in full. This can be done by selling the property, refinancing through a conventional mortgage, or using other assets. The loan does not become due if just one of the co-borrowers passes away; the surviving borrower can continue to own and live in the home, and enjoy all the benefits of the reverse mortgage.
Impact on your estate
Reverse mortgages are non-recourse loans, which means that the property alone stands for the loan amount to be repaid. The lender may not seek repayment from the homeowner's income, other assets, or heirs. If you or your heirs choose to repay the loan by selling the home, any sale proceeds in excess of the loan balance belong to you or your heirs. If you sell your home for a fair market price that is less than the loan balance, there will be no proceeds to keep, but the bank cannot claim from you or your estate more than the sale amount received.
During the life of your reverse mortgage, you are still the owner of the home and are responsible for paying property taxes and homeowners insurance, as well as maintaining the property. You can use the proceeds from your reverse mortgage to pay these expenses if you choose. Failure to meet these responsibilities can result in you being required to repay the loan even if you still own and live in the home.
Home Equity Conversion Mortgage (HECM)
A HECM is the most common type of reverse mortgage and has the following provisions:
The maximum amount that you can borrow is limited by the value of your home, your age when the loan begins (generally, younger ages are approved to borrow lower amounts), and an overall limit set by the Federal Housing Administration (FHA).
There are charges to initiate and service the loan; these are subject to maximum limits set by the FHA.
Most have variable interest rates tied to a published financial index which changes with market conditions, so the amount of interest added to the loan balance can change each month. The index used and the maximum amount a lender can add to that index are set by the FHA.
The loan must be used first to pay off any existing mortgage debt on your home. If you have a large existing mortgage relative to the value of your home, the HECM may not be able to cover the existing mortgage, and you would therefore not be eligible for the loan.
You can receive your proceeds in a lump sum, as regular payments for as long as you live in the home, as regular payments for a period of time that you choose, as a line of credit that you draw on as needed, or as a combination of these. If you plan to use the proceeds to help pay for a product that requires periodic payments, remember that the amount of the periodic payment could increase, while the payments you receive from your reverse mortgage remain the same, and the payments from your reverse mortgage could end before your obligation to make periodic payments ends.
Before taking a HECM loan, you must speaks with an independent counselor approved by the U.S. Department of Housing and Urban Development (HUD). The counselor is not affiliated with the lender and will explain the loan's costs, financial implications, and alternatives. This counseling is free.
Other types of reverse mortgages
Some lenders offer "proprietary" loans available with different terms than the HECM. These loans can sometimes have higher loan limits or otherwise be more flexible. The charges and interest rates may be higher or lower than the HECM.
Reverse mortgages are not appropriate for all homeowners. Please be sure to read your lender's disclosure statement and obtain free independent counseling to help you decide if a reverse mortgage is right for you.
Where to go for more information:
Reverse Mortgage Department
501 US Highway 22 West
Bridgewater, NJ 08807
601 E Street, NW
Washington, DC 20049
U.S. Department of Housing and Urban Development
451 7th Street, SW
Washington, DC 20410
TTY: (202) 708-1455
See the blue pages of your telephone book
for your local HUD office.
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
Lou Bleile, Reverse Mortgage Consultant
1529 Lakewood Landing #111
Imperial, MO 63052
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