What You Need to Know About a Reverse Mortgage

By Joe Botta

If you have heard about reverse mortgages but are not sure what they are or if they are right for you, here are some things you need to know or to ask. A reverse mortgage is simply a loan homeowners make on the equity in their home that does not have to be paid back for as long as they live in the home. The money can be received as a lump sum, as a regular payment, as a "credit line" or as a combination of these payment methods - and the loan is tax free. However, when you receive the funds does make a difference as to how much interest accrues on the loan. If you take a lump sum, the entire amount will start accruing interest from the day you take out the funds.

No matter how this loan is paid out to you, you usually do not have to pay anything back until you die, sell your home, or permanently move out of your home. Be sure that your loan contract states that even if the amount due is more than the value of the home when the note becomes due, the lender can receive no more than they get for the sale of the home providing the home is in good condition at the time of the sale.

To be eligible for most reverse mortgages, you must own your home and all parties must be 62 years of age or older.

Questions potential borrowers should consider are:

• Do you really need a reverse mortgage – what are you going to do with the money obtained?
• Can you afford one? Upfront costs can be high.
• Can you afford to start using your home equity now? The more you use now, the less that will be available for future emergencies.
• Do you have less costly options – what other resources do you have?
• Do you fully understand how these loans work? A reverse mortgage is a major fi nancial decision so you need to do your homework.

Help with the answers to these questions can be obtained by working with a U.S. Department of Housing and Urban Development approved housing counselor that is specifi cally certifi ed to counsel on reverse mortgages. This counseling is a mandatory requirement for all applicants before obtaining a reverse mortgage. After the counseling, the homeowner can choose to go ahead with the reverse mortgage loan or decline it.

An ideal candidate for a reverse mortgage is a homeowner in his or her 70's who has few resources and needs cash for medical expenses, food, and other life necessities. There are drawbacks to reverse mortgages. They frequently have high fees and the loan must be paid back at the homeowner's death, reducing the value of the estate that can be passed on to heirs.

For more information, please contact Marjorie Leon, who works as a certifi ed reverse mortgage counselor with the Prince William County Offi ce of Virginia Cooperative Extension. Marjorie can be reached at 703-792-4713 or mleon@vt.edu.

For additional information on reverse mortgages including benefi ts and cautions, see the suggested resources below:

"Top Ten Things to Know if You Are Interested in a Reverse Mortgage" – available from the U.S. Department of Housing and Urban Development at http://portal.hud.gov/hudportal/ HUD?src=/program_offi ces/housing/ sfh/hecm/rmtopten or call 1-800- 569- 4287 for the name and location of a HUD-approved housing counseling agency near you.

"Use Your Home to Stay at Home" – available from the National Council on the Aging at http://www. ncoa.org/news-ncoa-publications/ publications/ncoa_reverse_mortgage_ booklet_073109.pdf or call 1-800- 510-0301.

Reverse Mortgages "Get the Facts Before Cashing in on Your Home;" available from the Federal Trade Commission at www.ftc.gov/bcp/edu/ pubs/consumer/homes/rea13.shtm or call 1-877-382-4357.

Joe Botta, retired manager, VCE Prince William County Financial Education Program.

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Virginia Cooperative Extension programs and employment are open to all, regardless of race, color, national origin, sex, religion, age, disability, political beliefs, sexual orientation, or marital or family status. An equal opportunity/affirmative action employer. Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; Jewel E. Hairston, Administrator, 1890 Extension Program, Virginia State, Petersburg.