Reverse Mortgages

A reverse mortgage isn't really a mortgage at all.

A reverse mortgage allows you, the property owner, to access some of the value of your property without selling it. You remain the owner with all your current obligations. And you get a cash stream from your property. When the reverse mortgage agreement is over you or your heirs must repay all of your cash advances plus interest. Reputable lenders don't want your house; they want repayment.

Although there are different types of reverse mortgages all of them are similar in certain ways. For instance, you are still responsible for paying your own property taxes, homeowner insurance and repairs. So this doesn't change.

There are things you should be aware of with reverse mortgages. While they can be ideal, you need to know what it will mean for you.

Reverse Mortgage Cancellation

After closing a reverse mortgage you have three days to reconsider your decision. This is generally referred to as a "cooling out" period and most consumer law incorporates some amount of time to back out of a financial transaction.

Therefore, if for any reason you decide you do not want the reverse mortgage loan you can cancel it. But you must do this within three business days after closing. "Business days" include Saturdays, but not Sundays or legal public holidays. Also note, if you do decide to cancel you must do it in writing. Your lender may provide you with a form. You can also send your own letter by hand delivery, fax, mail or telegraph company, but it must be sent before midnight of the third business day. You can't cancel in person. Be sure that you clearly indicate, in any correspondence, that you want to cancel your reverse mortgage and include any loan number if possible.

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Reverse Mortgage Debt Limit

How do you know how much you'll owe the lender at the end of the reverse mortgage? The amount you will owe equals all the money you receive from the reverse mortgage (including any you used to finance the loan or to pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth at that time, then you (or your estate) keep whatever amount is left over.

Here's the good news: you can never owe more than what your home is worth at the time the loan is repaid. The lender may not seek repayment from your income, your other assets or from your heirs. The lender is gambling on the value of your home in giving you the loan.

The technical term for this is a "non-recourse limit." It means that the lender does not have legal recourse to anything other than your home's value when seeking repayment.

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Reverse Mortgage Debt Payoff

Reverse mortgages generally must be "first" mortgages. What this means is that the reverse mortgage must be the primary debt on your home, as well as the debt that is paid first. If you currently owe any money on your property you usually have two options:

  1. Pay off the old debt before you get a reverse mortgage; or
  2. Pay off the old debt with the money you get from a reverse mortgage.

In most cases, you will be best off to pay any home debt with a lump sum from your reverse mortgage. This will consolidate your debt in the reverse mortgage.

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Reverse Mortgage Financing Fees

Many, if not most, organizations providing reverse mortgages will charge some fees for the loan. You can either pay these fees out of pocket or use the money you get from the loan to pay them.

Your lender may refer to "financing" the loan cost and this generally refers to you adding the cost of the fees to the loan. Remember that if you do this you will also be paying interest on the additional loan amount.

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Reverse Mortgage Loan Amounts

The amount of money you can get depends most on a number of factors and each company offering reverse mortgages may have their own programs and approaches. However, the amount will usually depend on your age and your home's value.

In general:

  1. The older you are the more of your home's value you can mortgage, and
  2. The more your home is worth the more cash value you have access to.
  3. Keep in mind that the specific amount that you may obtain may also depend on interest rates as well as average closing costs on home loans in your area.
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Reverse Mortgage Repayment

Typically, reverse mortgages must be paid in full when the last surviving borrower dies or sells the home.

Reverse mortgage lenders can also require repayment if you:

  1. Fail to pay your property taxes;
  2. Fail to maintain and repair your home; or
  3. Fail to keep your home insured.

Since the lender is gambling on the value of your home they will usually have these conditions specified in the contract. After all, all of these problems can affect the value of your home (and property taxes will normally be paid first out of the sale of a property, which reduces the net proceeds.)

Other default conditions include:

  1. Your declaration of bankruptcy;
  2. Your donation or abandonment of your home;
  3. Your perpetration of fraud or misrepresentation;
  4. If a government agency needs your property for public use (for example, to build a highway); or
  5. If a government agency condemns your property (for example, health or safety reasons).

All of these default conditions affect the value of the property or your ability to pay. In this case, the lender will be looking to get as much value as possible from your property.

Be aware that other conditions that appear to affect the security of the loan could make it immediately payable. Examples of this are:

  1. Renting out part or all of your home;
  2. Adding a new owner to your home's title;
  3. Changing your home's zoning classification; or
  4. Taking out new debt against your home.

In the final analysis, making use of a reverse mortgage may only make sense if the house is unencumbered by debt and you or your family will be making use of the property.

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