A reverse mortgage turns equity into cash

This was originally published on Monday, March 24, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

QUESTION: My husband and I are retired and live on a limited income. We unfortunately do not have a lot in savings or in a retirement fund. We are living paycheck to paycheck and would like to have more money to pay bills and other necessities. Could you give us some advice on reverse mortgages?

ANSWER: I’m not aware of any reverse mortgages being offered on Guam, but I’ll answer your inquiry. Many retirees are facing this same issue, especially with the rise in the cost of living. A reverse mortgage can turn the equity of your home into cash. Unlike a regular mortgage, you do not pay the bank on the amount you are lent, instead the bank pays you, and you do not have to pay on the loan until you no longer live in the home. But just like any other loan, you need to understand what exactly a reverse mortgage is, how it affects you and your family, and the risks.

What is a reverse mortgage? A reverse mortgage is a special mortgage that uses the equity in your home to provide you with cash either in lump sum, monthly or as a line of credit. You do not have to repay the loan until the property is no longer considered as your primary residence. The property is no longer considered your primary residence if you die, sell the home or move to another house. You do not have to sell your home or pay an additional monthly expense. The earnings of a reverse mortgage are usually tax free, are not dependent on your income or credit score.

Who is eligible? According to the U.S. Department of Housing and Urban Development (HUD), you must be 62 years of age or older and be the outright owner of the property or have helped pay a considerable amount on the home. The home must be your primary residence and not delinquent on any federal debt. You must have some income to be able to pay property taxes, insurance or homeowner association fees, etc. Some banks and lenders may have other eligibility requirements.

What types of homes are eligible? The home cannot be a vacation or investment property. The house must be a single-family home or a two- to four-unit building with one of the units occupied by the borrower. The home must meet the Federal Housing Administration’s (FHA) requirement or be a HUD-approved condominium project. Any existing mortgages must be paid off. The proceeds from the reverse mortgage can be used to pay off a mortgage. The reverse mortgage must be the primary lien on the home. Some banks and lenders may have other eligibility requirements.

Reverse mortgage advances are not taxable and usually do not affect your federal benefits such as Social Security or Medicare. The loan lets you keep the title of your home. The borrower can live in a nursing or medical facility up to twelve consecutive months before the loan is repaid.

You should be aware that there are fees associated with the reverse mortgage, such as closing costs, origination fee and mortgage insurance premium. Banks may include other fees. These fees can be rolled into the loan but will increase the cost of the loan, which you will pay interest on.

The amount you owe on the mortgage increases over time as interest is charged on the outstanding balance. Instead of paying on the interest every month like a regular loan, your balance grows as the loan accrues interest.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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