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Reverse Mortgage
A Reverse Mortgage Defined In general, the older you are and the more valuable your home (and the less you owe on your home), the larger the reverse mortgage can be. What are the Disadvantages?
A reverse mortgage is a special type of loan used by senior homeowners to convert part of the equity in their home into cash or tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The money from a reverse mortgage can provide seniors with the financial security they need to enjoy their retirement years to the fullest.
The reverse mortgage is aptly named because the payment stream is "reversed." Instead of making monthly payments to a lender, as with a regular first mortgage or home equity loan, a lender makes payments to you.
While a reverse mortgage loan is outstanding, you continue to own the home.
You Will Never Be Forced Out of Your Home
Borrowers will never, under any circumstance resulting from the reverse mortgage, be forced to leave their homes providing they pay their real estate property tax and insurance premiums.
Borrowers can choose to receive the reverse mortgage funds as a lump sum, monthly income (for up to life), or a line of credit, or as a combination of monthly income and line of credit. No mortgage payments are due during the life of the loan. Borrowers can use the funds anyway they wish. Borrowers make no monthly payments on a reverse mortgage during its term. The loan becomes repayable when the borrower sells the home or permanently moves out. In addition, the repayment amount can't exceed the value of the home.
What can the Money Be Used For?
The money from a reverse mortgage can be used for ANYTHING, including the following:
If your home needs physical repairs (mandatory repairs) in order to qualify for a reverse mortgage, a portion of the proceeds will be set aside for this purpose.
To qualify for a reverse mortgage, you must be at least 62 years old and own your own home. There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. In fact, many seniors get a reverse mortgage to pay off a first mortgage.
Options on How to Receive Money from a Reverse Mortgage.
The size of the reverse mortgage you can receive depends on:
What Costs are Associated With a Reverse Mortgage?
They include the origination fee (which can be financed as part of the mortgage), an appraisal fee, and other charges similar to those for regular mortgages.
The money provided to you from a reverse mortgage is tax-free, and does not affect regular Social Security or Medicare benefits. However, the funds received from a reverse mortgage may affect your eligibility for certain kinds of government assistance, such as Medicaid or state assistance programs. So, you should check into this before getting a reverse mortgage. To do this, you may wish to consult with your local Area Agency on Aging (to locate, call 1-800-677-1116, or visit http://www.www.eldercare.gov), a reverse mortgage lender, or a tax attorney.
If you are over age 62 and have equity in your house, a reverse mortgage might sound intriguing. With a reverse mortgage, you get to convert the equity in your house to cash, plus you get to age in place, in your home. What's more, you don't have to make any interest or principal payments during the life of the loan.
But as with all things that sound too good to be true, especially something that sounds too good to be true for what could be your single largest asset and a future source of retirement income, there's a catch with reverse mortgages. For one thing, the loan costs can be steep. Also, interest is added to the principal, making reverse mortgages "rising debt" loans.
"The bottom line is that reverse mortgages are an expensive option that may prematurely deplete your home equity," FINRA said. "A reverse mortgage is a very serious decision."
Consider, for instance, some of the disadvantages FINRA outlined:
- The income or lump sum you receive could impact you or your spouse's eligibility for various state and federal benefits, including Medicaid.
- A reverse mortgage may not enjoy the same home-equity protection that would otherwise apply against creditors, or if you have a health emergency and your spouse must liquidate assets to pay for nursing home care.
- A reverse mortgage is not the right choice if you want to leave your house to your heirs.
- A reverse mortgage may be right for you. But you need to evaluate a number of factors, including your health, your spouse's health, other sources of income, the reason you're tapping your home equity, when to do it, and how wisely you use your loan proceeds - before deciding whether a reverse mortgage is right or not.
As an alternative to a reverse mortgage, you could sell your house and then downsize or rent, or take out a home equity loan, or get help from your children or a local government assistance program. Any of those tactics could unlock the equity in your home without the cost of a reverse mortgage.
How Do I Begin the Process?
Before applying for a reverse mortgage, you must first meet with a reverse mortgage counselor. You may, however, first approach a reverse mortgage lender, who can provide you with the names of approved counseling agencies in your area. A list of approved counseling agencies nationwide is posted on the Internet by the U.S. Department of Housing and Urban Development. http://www.hud.gov/buying/rvrsmort.cfm
The counselor will educate you about reverse mortgages, and inform you of other alternative options given your situation, as well as assist you in determining which particular reverse mortgage product best fits your needs.
No payments are due on a reverse mortgage while it is outstanding. The loan becomes due and payable when you cease to occupy your home as a principal residence. This can occur if you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out.
Where can I get a Reverse Mortgage?
They are offered by banks, mortgage companies, and other financial institutions.
In the U.S., the most popular reverse mortgage is the federally-insured reverse mortgage, called the FHA Home Equity Conversion Mortgage Program (HECM). The other major product is the Home Keeper reverse mortgage, developed in the mid-1990s by Fannie Mae, a private national mortgage company. One "jumbo" private reverse mortgage product, designed to accommodate seniors living in higher-priced homes, is offered by Financial Freedom Senior Funding Corp. of Irvine, CA. This is the Cash Account Plan. The HECM and Home Keeper products are available in every state, while Financial Freedom's product is offered in 21 states and the District of Columbia.