Home Equity Conversions:
Reverse Mortgages

Authors: Patricia Gorman, graduate assistant, and Kathleen Parrott, Extension housing specialist, Virginia Tech

September 1996

Many senior adults are finding it hard to live on the fixed incomes of their retirement and are looking for ways to supplement their monthly incomes. For some, the largest asset that they own is their home, but they do not want to sell their home and move. For these individuals, there is an option called Home Equity Conversion (HEC).

One type of home equity conversion is a reverse mortgage. The equity or cash value of the house is used to provide income to repay the loan. All reverse mortgage options are not the same. They have different eligibility requirements, income amounts, timing of payments, interest rates, and/or initial costs. A comparison of the different options is advised considering the goals and needs of the homeowner.

Advantages The value of the house, not the income of the homeowner, is used to determine eligibility. Individuals can receive a lump sum, a line of credit, or a monthly amount, without having to make a monthly repayment. Homeowners do not have to sell their home and move, and can continue to live in the same familiar surroundings. The homeowner does not have to worry about losing the home to foreclosure since the payments are made out of the equity of the home, not from the income of the homeowner.

Disadvantages Interest for a reverse mortgage is compounded, and cannot be deducted on income taxes until it is repaid. The income received decreases the equity in your home, and the equity may not be adequate for future needs or for your estate. Interest rates and initial costs (application fees, points and closing costs) are usually higher for a reverse mortgage than for other equity loans. Income ends when you sell your home or no longer use it as a principal residence.

Eligibility

A lender looks at the equity of the home plus any expected appreciation or depreciation in the value of the home to calculate a base amount. The costs associated with any reverse mortgage loan (application fees, interest rates, closing costs, initial charges, sales commissions, and insurance) also must be considered. All reverse mortgages currently available in Virginia require insurance.

The lender and the homeowner must work together to determine the type of payment, the payment amount, and the time period. This is determined not only by the calculations of the base amount by the lender, but also by keeping in mind the goals and financial needs of the homeowner.

Income Income from a reverse mortgage is not taxable, and will not affect Medicare eligibility or benefits. But the added income can affect both Supplemental Security Income and Medicaid eligibility and benefits for Virginia residents.

Confused? A home equity conversion is not a home equity loan! Home-equity loans require that a homeowner has enough income to pay back the loan, and the payments are made in monthly amounts. A home-equity loan would not work for the majority of senior adults who are living on limited fixed incomes and who could not afford a loan payment.

Example

Mary Jones, a 75-year-old widow who's home is her principal residence, can be used as an example. She is looking at a 10 year reverse mortgage that will provide her with additional monthly income of approximately $450. At the end of the ten years the monthly income payment will stop. But because her loan is through an insured lender, the loan will not have to be repaid until she sells the home, moves, or dies.

Home Equity Conversion Checklist
These questions are provided to help you determine if you are eligible for a home equity conversion (HEC).
							YES		NO
1.		Are you 62 years of age or older?					_____		_____
2.		Is your mortgage paid off in full or nearly so?					_____		_____
3.		Do you use your home as your primary residence?					_____		_____
If you have answered yes to questions 1-3, you might want to consult with an HEC lender for specific information.
The following questions will help to determine if you are eligible for a Housing and Urban Development (HUD) home equity conversion. A HUD-HEC is similar to other HECs but with additional requirements for the property and residents.
4.		Is your home a single-family dwelling?					_____		_____
5.		Does your home probably meet HUD minimum property standards?					_____		____
6.		Is your family income probably less than 80% of area median?					_____		_____
If you have answered yes to questions 1-6; you might want to consult with a HUD-HEC lender for specific information.
		a.	The following lenders offered HEC mortgages at the time this fact sheet was prepared:
			Tidewater First Financial Group 4500 Holland Office Park Suite 312 Virginia Beach, VA 23452 (800) 282-4326			International Mortgage 3701 Old Court Road Baltimore, MD 21208 (410) 484-6016
			Home Income Security Plan, Capital Holding Corporation 1-800-456-8754
		b.	The following lenders offered HUD-HEC mortgages at the time this fact sheet was prepared:
			Northern Virginia Area
			Ameribanc Savings 7630 Little River Turnpike Annadale, VA 22003 (703) 658-5500			Mortgage Capital Investors, Equity Division 6571 Edsall Road Springfield, VA 22151 (703) 941-0711
			Tidewater Area
			Crestar Mortgage Corporation 564 Lynnhaven Parkway Virginia Beach, VA 23452 (757) 431-4876			Tidewater First Financial Group 4500 Holland Office Park Virginia Beach, VA 23452 (800) 282-4326
Inclusion on this list of lenders does not imply endorsement by Virginia Cooperative Extension, nor does omission from this list imply a lack of endorsement.

Visit Virginia Cooperative Extension