If you’ve heard about reverse mortgage loans, you might be wondering what they are all about, and if they are right for you. For example, you may wonder about reverse mortgage costs or whether benefits of a reverse mortgage are considered income. The following questions about your own reverse mortgage details may provide a helpful starting place:
- Do you want money to pay off your mortgage?
- Do you want to supplement your income?
- Do you need extra cash to pay for health care expenses?
- Do you need some extra funds to make home repairs or renovations?
- Are you 62 years of age or older?
If your answer to any of the above questions is YES – you might want to gather more information about reverse mortgages – specifically reverse mortgage programs, benefits, drawbacks, guidelines and requirements.
Types of Reverse Mortgage
Simply put, a reverse mortgage is a “loan” for seniors, age 62 and older. There are three primary types of reverse mortgages:
- Single purpose reverse mortgages. These are offered by some state and local government agencies, as well as non-profits. While they are least expensive option, these loans are designed for a single purpose, i.e. to pay for home improvement project.
- Proprietary reverse mortgages. There are private loans, and if you have a higher valued home, this might be a good option.
- Federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs). The reverse mortgage loan, known as the Home Equity Conversion Mortgage (HECM) is a program of the Federal Housing Administration (FHA) and insured by the FHA. These mortgages may be more expensive than traditional home loans, and the upfront costs can be high. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount.
Benefits of a Reverse Mortgage
Reverse mortgages allow homeowners to convert part of the home equity in their homes into cash without having to sell the home or pay additional monthly payments. In this way, a reverse mortgage differs from a home equity loan or second mortgage, because you do not have monthly payments to repay or a payment schedule to pay off the home equity loan or second mortgage. You can think of a reverse mortgage as getting an “advance” on your home equity. Perhaps you no longer have a mortgage on your home, and in that case your equity is 100% of the home’s value. But be careful, a reverse mortgage can be a complicated process, so you will want to make sure it is right for you.
Once you apply and meet the criteria, you would receive your funds in number of different ways. NOTE: Not all lenders offer all of these options.
- Lump sum – a lump sum of cash at closing.
- Tenure – equal monthly payments as long as the homeowner lives in the home.
- Term – equal monthly payments for a fixed number of years.
- Line of Credit – draw any amount at any time until the line of credit is exhausted.
- Any combination of those listed above
Your reverse mortgage is in place so long as you live in your home. When you die, or in the event that the home ceases to be your primary residence for more than 12 months, the home can be sold and the cash, interest, and other finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. Be sure you have asked the question: What if my house is sold for less than the amount of the reverse mortgage? In general, your other assets should not be affected by a reverse mortgage.
Drawbacks of reverse mortgages to research and review
- Exhaust assets. A reverse mortgage can use up the equity in your home, which means fewer assets for you and your heirs. Check to make sure your reverse mortgages has a “non-recourse” clause. This means that you, or your estate, can’t owe more than the value of your home when the loan becomes due and the home is sold.
- Fees and costs. Check out your reverse mortgage costs Ask whether your lender charges an origination fee and/or other closing costs, servicing fees while you have the mortgage in place, or premiums for mortgage insurance.
- Amount owed increases over time. Depending on how you elect to receive your mortgage funds, check to see whether interest is added onto the balance.
- Interest rates may change. Be aware of your reverse mortgage rate. Since most reverse mortgages have variable rates, they are connected to index affected by the market fluctuations. NOTE: HECMs are usually on fixed rate, but likely your borrow amount is lower than a variable rate loans.
- Interest is not tax deductible each year. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off (partially or in full). On the other hand, neither are the proceeds of a reverse mortgage taxable income.
- Avoid default on household expenses. In a reverse mortgage, you are living in your home and have kept the title thereto. Accordingly, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you are unable to pay your property taxes, keep homeowner’s insurance, or maintain your home, the lender might require you to repay your loan. If there is is concern of this, a lender may require escrow funds or “set-aside” amount to pay your taxes and insurance during the loan. This escrow determination will likely reduce the amount of funds you can get in payments.
- Spousal rights. Check to make sure what happens to your spouse after the first spouse dies. If only one spouse has signed the reverse mortgage loan, it may be the mortgage payments will stop upon the death of that spouse (the monthly payment option is selected). Read the small print and understand how the death of one spouse will affect the terms of your mortgage.
Reverse Mortgage Requirements: How do I qualify?
To be eligible for the HECM, you must meet the following criteria:
- Your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
- All homeowners be at least age 62.
- The home must be owned free and clear, or all existing liens must be satisfied with proceeds from the reverse mortgage. If there is an existing mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at closing.
How Much Can I Borrow?
With a reverse mortgage the amount that can be borrowed is determined by an FHA formula that considers age, the current interest rate, and the appraised value of your home. Typically, the more valuable the home, the higher the loan amount will be, subject to lending limits. Note also that they will look at the age of the youngest borrower, or eligible non-borrower spouse.
What if I change my mind?
With most reverse mortgage loans, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.” To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. Keep copies of everything.
As with any financing options for your retirement, seeking professional counsel is the smartest move. Is a reverse mortgage right for you? Only you can decide what works for your situation. Ponder the information you have gathered here. Happy retirement!
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