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Reverse Mortgages Convert Home Equity into Cash

Q: What is a reverse mortgage?
A: Generally speaking, a reverse mortgage is a type of loan that may be used to convert the equity in a home into cash for a homeowner. The amount of the loan is derived, in part, from the amount of equity the homeowner has in the home.   

Q: Why is it called a “reverse” mortgage?
A:
 A homeowner who uses a conventional (“normal”) mortgage begins with little or no equity in the home, and gradually pays the lender until the homeowner has paid so much money that he/she has 100 percent equity in the home, owning it “free and clear.” In a “reverse” mortgage, the borrower begins with substantial (or complete) equity in the home, and it is the lender who makes payments to the homeowner. In this way, the lender obtains equity in the home while the homeowner loses equity. Most homeowners choose to take monthly installments of their loan proceeds from a reverse mortgage, meaning that the lender makes monthly payments to the homeowner over time. However, a homeowner may choose to receive the proceeds through a different periodic payment schedule (such as an annual payment), or through a line of credit, a combination of periodic payments and a line of credit, or a lump sum. 

Q: If the bank pays me, does that mean I don’t pay anything?
A:
 Not exactly. The loan is a transaction, and like any transaction, there are costs. The same types of fees and closing costs that apply to conventional mortgages also apply to reverse mortgages. Also, since you are still the homeowner, you will continue to be liable for property taxes and homeowner’s insurance. 

Q: How do I know if I qualify for a reverse mortgage?
A:
 To qualify for a reverse mortgage, you must be at least 62 years old and you must own your own home. Also, you may obtain a reverse mortgage only for a home you use as your primary residence.

Q: I’m more than 62 years old.  How can I tell if a reverse mortgage is right for me?
A:
 If your income is too small to cover your regular living expenses, a reverse mortgage can help you make ends meet. However, because you would be giving up the equity in your home, you should consider a reverse mortgage only when you have a significant financial need. Avoid being pressured into obtaining a reverse mortgage if you have sufficient assets to meet your financial obligations and needs.

Q:  If I think a reverse mortgage may be right for me, what should I do?
A:
 First, assess your financial situation. Consider your budget and past expenses and try to realistically predict your future needs. Second, meet with a counselor; this is required under federal law. A list of government-approved counselors can be found at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm. A counselor will help you understand reverse mortgages, and possible alternatives. Third, if you believe a reverse mortgage is right for you, ask friends, relatives or co-workers to recommend a lender. Fourth, shop around; investigate many lenders and compare the information they give you. It is wise to choose a lender that regularly makes reverse mortgage loans. You also may wish to consult an attorney before signing anything.

Q: I’ve heard that some lenders prey upon older people. How can I get more information about reverse mortgages and make sure I’m dealing with a reputable lender?
A:
 For general information about how reverse mortgages work and how to avoid predatory lenders, you may wish to visit the websites of the Federal Trade Commission (www.ftc.gov) and the Department of Housing and Urban Development (www.hud.gov). Type “reverse mortgage” in the “search” box of each site.

11/19/2013

This “Law You Can Use” column was provided by the Ohio State Bar Association (OSBA). It was originally prepared by attorneys Russell D. Kornblut and Nathan G. Haskell. It was updated by  Russell D. Kornblut of The Law Office of Russell D. Kornblut in Cleveland.   

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Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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