Table of Contents Page Home Page

Should I consider taking out a reverse mortgage?

QUESTION:

Mom has had a few health problems recently and could really use some cash. My mother has been living in her home for forty years and finished paying the mortgage years ago. What is a reverse mortgage and would it work for her?

ANSWER:

Before you consider a reverse mortgage, it's a good idea to understand the differences between a reverse mortgage and a conventional mortgage.

Unlike an ordinary home equity loan, there need not be proof of a monthly income sufficient to make mortgage payments. In fact, a reverse mortgage does not require any repayment as long as the borrower lives in the home. Lenders recover their principal and interest when the home is sold.

The size of a reverse mortgage is determined by the borrower's age, the interest rate and the value of the home. The older a borrower, the larger the percentage of the home's value that can be borrowed. For example, based upon an interest rate of 9 percent, a 65 year old could borrow up to 26 percent of the home's value, a 75 year old could borrow up to 39 percent and an 85 year old could borrow 58 percent.

Your mother could receive payments in a lump sum, on a monthly basis for a fixed term or for as long as she lives in the home. She could also receive payments on an occasional basis as a line of credit. How payment is received can be changed if her situation changes.

Unlike ordinary equity loans, the lender does not take title to the home. A reverse mortgage is a lien against the property just as there is a lien against the property with a traditional mortgage. When the loan matures, the lien is paid.

The proceeds from a reverse mortgage can be used for anything that your mother wishes. She could create additional monthly income, pay off her credit card debts, or, as you mentioned, pay medical bills.

The U.S. government began sponsorship of its own program in 1989. The process is similar to other reverse mortgage programs, except that if the proceeds are insufficient to pay the amount owed when the home is sold, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage. There are no asset or income limitations on borrowers receiving HUD's reverse mortgages.

There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area. Owners of higher-priced homes may not borrow any more than owners of homes valued at the FHA limit.

You and your mother should carefully investigate all the costs, implications and rules of reverse mortgages before agreeing to obtain one.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

Back to the top of the page