If you are a senior homeowner, you can convert the equity in your home into a monthly income or line of credit through a reverse mortgage.  Unlike a traditional (forward) mortgage where you make monthly payments and build up equity, with a reverse mortgage you convert your home equity into monthly income payable to you.  The beauty of a reverse mortgage is that repayment is not required until you die, sell the home, or permanently move away.    When you move out of your home, the amount of money you received plus accrued interest will be due.  Generally, the reverse mortgage is paid off by selling the home.   If the cash from selling the home is less than the loan balance, you or your estate can not be held responsible for the difference.  If the home sells for more than the mortgage balance, you or your heirs can pocket the difference

How Much Can I Get?

The payments you receive are based on the amount of the home equity you can borrow.  The amount you can borrow can range from 30% to 80% of the appraised value of your home depending on your age and the current interest to be charged on the loan. The older you are, the more you can borrow.  The amount of equity you can borrow also depends on the home equity conversion program you select.  The amount of cash you can receive and the expenses associated with the mortgage can vary among lenders.

Marge, a 75 year old homeowner whose home is appraised at $100,000, secures an 8% reverse mortgage. Based on her age, the interest rate, and the appraised value of her home, she is eligible to borrow $53,700. 

Federally Insured Reverse Mortgages

The two principal sources of  reverse mortgage money comes from financial institutions who make loans insured by the FHA or Fannie Mae.  The FHA program is known as the “Home Equity Conversion Mortgage” (HECM) and the Fannie Mae program is known as the “Home Keeper Mortgage”.

To compute the maximum appraised value that can be considered for determining the FHA Home Equity Conversion Mortgage is $219,849.  The maximum appraised value for the Fannie Mae Home Keeper Mortgage is $252,700.  These amounts may be lower depending on the cost of housing in the county in which you live.   With the HECM program, the loan limit can be increased monthly to take into consideration the effects of inflation.

You must be at least age 62 and own a home that is completely paid off or close to being paid off.  If you still owe on your mortgage, the balance will have to be paid off with some of the cash you get from the reverse mortgage.

The costs of obtaining a reverse mortgage can be 10% to 20% of the amount of the mortgage and sometimes more.  The costs include the following items:  Interest, appraisal, title insurance, origination fees, surveys, servicing fees, mortgage insurance, and other closing costs. Before you secure the loan, you are required to receive independent counseling on the benefits and pitfalls of reverse mortgages.  As a part of the process, be sure you understand all of the costs associated with the mortgage and determine how much equity you will have remaining at the end of the loan.

Payment Options

Once you qualify for a reverse mortgage, you can receive cash payments in one of six ways.

Tenure:  You receive equal monthly payments as long as you occupy your home.

Term: You receive equal monthly payments for a fixed number of years that you select.

Line of Credit: You receive a payment for any amount within the loan limit whenever you need it.

Modified Term or Tenure: You receive a line of credit for extraordinary needs and you also receive a fixed monthly payment.

Lump-sum Payment: You receive the maximum amount available in one lump-sum at the time of closing.

Combination Option: You receive a combination of a partial lump-sum, monthly payments, and a line of credit.

Line of Credit Options

With the HECM “line of credit” option you can select a “fixed” line of credit or a “growing” line of credit.   With a fixed line of credit, the amount of the available cash is fixed at the time you sign the loan documents.  As you draw out money, your credit line decreases permanently.  With a growing line of credit, the remaining amount of cash available may increase by a given rate.  The rate is variable and may increase or decrease over time.   

Example:  Joan qualifies for a $100,000 HECM.  She selects the “line of credit” option and draws out $40,000 at closing.  The comparison of a fixed and growing credit line are shown below:

	Fixed	Growing @ 7%
Line of Credit	$100,000	$100,000
Initial Draw	$  40,000	$  40,000
Remaining Balance	$  60,000	$  60,000
Balance 5 Years Later	$  60,000	$  84,153

Shared Equity Option

The Fannie Mae Home Keeper Mortgage has a shared equity feature that allows you to borrow more money in exchange for 10% of the equity in the home when the loan is paid off.   This arrangement should only be considered if the additional sum is absolutely required and if you plan on living in the home for several more years. 

Harvey, age 75, secures a Fannie Mae Home Keeper Mortgage on his home worth $150,000.  He agrees to share 10 of the equity in the home when the loan is paid off.  Under this arrangement he is able to borrow $72,369.  Had Harvey not agreed to the shared equity arrangement, the loan would have been limited to $53,635

Home Equity Conversion Mortgage Vs. Home Keeper Mortgage Example:

Marge, age 75, owns a home free and clear valued at $100,000.  The benefits she could receive under the HECM and Home Keeper programs are shown below:

	HECM	Home Keeper
Lump-sum amount	$ 53,694	$ 50,137
Line of Credit amount	$ 53,694	$ 50,137
Growing Line: Growth Rate	7%	NA
Unused line of credit in 5 years	$ 75,309	$ 50,137
Unused line of credit in 10 years	$105,624	$ 50,137
Monthly payment	$ 383	$ 447

Before you consider a reverse mortgage and incur the heavy costs of securing the loan, consider other avenues of generating cash for your retirement needs.  These avenue consist of (1) an outright sale of your home, (2) a sale-leaseback of your home, (3) renting a portion of your home, and (4) obtaining financial support from family members who will eventually inherit your home.  Obtaining a reverse mortgage should generally be the last option you consider.

Under a sale-leaseback arrangement, you sell your home to an investor who leases it back to you for your life or until you move.  The transaction can be structured so that you receive a down payment and monthly payments from the buyer that are greater than your monthly lease.  In addition, you will be relieved of the payment of property taxes, insurance, and maintenance.  The lease should contain a provision that places a ceiling on the maximum amount of rent that can be charged over the term of the lease.

Joan, age 70, owns a home worth $200,000.  She sells the home to Bob at a 25 percent discount to take into consideration her lifetime right to lease the home.  Marge receives a 10 percent down payment of $15,000 and monthly payments of $1,451 based on a term of 15 years and 10 percent interest rate.  Marge pays rent of $751.  The rent is taken out of the monthly payments leaving her with $700 a month.  The lease has a cap of 3 percent on the annual rent increase.

As a reverse mortgage borrower, you will continue to own your home.  Consequently,  you will be responsible for the payment of taxes, insurance, and upkeep.  Failure to be responsible for these items may cause the loan to be in default.

The cost of applying for a reverse mortgage should be less than $500.  Application costs  consist of the appraisal and a credit report.  

Before you enter into a reverse mortgage, be sure to compare the costs of different reverse mortgage lenders.  The costs can vary significantly.  Especially compare “origination” and “servicing” fees.  Ask the lender to show and explain to you the “TALC” rates.   TALC rates are the “Total Annual Loan Costs” that lenders are required to disclose under the federal Truth-in-Lending law.  TALC rates are not to be confused with “Annual Percentage Rates (APR)” disclosed in connection with “forward” or regular mortgages.  TALC rates reflect the total annual average cost of obtaining the loan.  This rate will generally decrease the longer the reverse mortgage is outstanding. 

The money you receive from your reverse mortgage is not considered taxable income. It is not counted as income when determining whether or not your Social Security is taxable.  However, if you are receiving SSI or welfare benefits, you should determine whether or not the reverse mortgage payments could effect your eligibility.  

Interest that accrues on the reverse mortgage is not deductible as mortgage interest until it is paid.

Call 800-245-2691 to find out if a HUD/FHA sponsored reverse mortgage is offered in your community.  For a free booklet on reverse mortgages write to:  Home Made Money, AARP Home Equity Conversion Service, 1909 K. ST. NW., Washington D.C. 20049.  

To find out which financial institutions in your community make Fannie Mae reverse mortgages call Fannie Mae at 800-732-6643.  Request their free booklet "Money From Home".

For information on the internet about reverse mortgages, point you browser to: http://www.reverse.org  or  http://www.aarp.org/hecc/basicfct.html

The AARP foundation has printed and audiovisual materials on reverse mortgages.  To order these materials at little or no cost, call Hud User at 202-434-6042.

To locate free or low-cost reverse mortgage counseling from an agency in your area, call the Housing Counseling Clearinghouse at 1-888-466-3487 (9 a.m. to 5 p.m. EDT)

To order a current list of “preferred counselors” and lenders from the nonprofit National Center for Home Equity Conversion, send $1 in a self-addressed stamped business size envelope to NCHEC, 7373 147th Street West #115, Apple Valley, MN 55124.