Over the last few years, reverse mortgages have been growing in popularity. They can be an excellent tool allowing seniors to stay in their homes. They are, however, complex financial transactions which should not be entered into lightly. Here are a few thoughts on the topic.
What is a Reverse Mortgage?
Basically, a reverse mortgage is a loan which you are taking out against the equity in your home. In a typical loan, you make payments each month, and the debt that you owe decreases a little with each payment. With a reverse mortgage, the bank makes payments to you each month, and the amount of your loan increases each month. The payments are calculated to continue for a number of years until you have reached a maximum loan amount (60-80 percent of your home’s value). At that point, you would not receive any further payments, however you are also not required to pay back the loan. It may also be possible to receive a lump sum or line of credit instead of monthly payments. The loan is due only when you move out of the house. When the house is sold, any equity remaining in the house after repaying the loan is yours to keep.
What are the advantages of a Reverse Mortgage?
A reverse mortgage can allow you to stay in your house by removing your monthly mortgage payment and instead giving you a monthly income. That income can be used to maintain the house, pay for in home care, property taxes or anything other purpose. This can allow seniors to live a long healthy life in their own home.
What are the disadvantages of a Reverse Mortgage?
Although reverse mortgages are a great product, they are not for everyone. First, you should understand that you are borrowing against the value of your home. As a result, when you do sell your home, you will receive less equity or your heirs will inherit less money. Second, there are some fees at the outset of the loan which are comparable to the fees associated with purchasing a home (about 5% of your home’s value). Therefore, it may not make sense to obtain a reverse mortgage if you are only planning to stay in the house for a couple of years. Third, it may not be the right thing if you are ready to move into assisted living or a nursing home. If nursing home care or assisted living is what you need, it would be better to sell the house and make the move.
How do I get one?
You must be over the age of 62 and have paid off quite a bit of your mortgage. Not all lenders offer reverse mortgages. Lists of reverse mortgage lenders in Illinois are available on the web. Once you have located a lender, they will explain how much they can lend you and over what period of time. You will be required to meet with an FHA approved housing counselor for about 45 minutes. Finally, you should have a lawyer or financial planner review the terms of your loan to ensure that you understand the details of the agreement.
How can I learn more?
There are a number of independent organizations that provide information about reverse mortgages. The Department of Housing and Urban Development (HUD) publishes a list of things you should know about reverse mortgages. AARP also produces several articles on this topic. Links to some of these resources are available on our firm’s web site at www.stotisandbaird.com. The important thing to remember is to make sure that you receive information from independent sources and not just the lenders themselves.
Eric Parker is an attorney with the law firm of Stotis & Baird, Chartered in Chicago. He specializes in injury litigation, nursing home neglect and issues facing the elderly. He has no interest in any reverse mortgage company or broker.