A Reverse Mortgage Defined
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:
- Daily living expenses
- Home repairs and home modifications
- Medical bills and prescription drugs
- Pay-off of existing debts
- Continuing education
- Long-term health care
- Prevention of foreclosure, and other needs.
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.
- All at once (lump sum)
- Fixed monthly payments (for up to life)
- A line of credit
- A combination of these
- The most popular option – chosen by more than 60% of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time
The size of the reverse mortgage you can receive depends on:
- Your age at the time you apply for the loan
- The type of reverse mortgage you choose
- The value of your home
- Current interest rates
- And – sometimes – where you live.
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 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.
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.