Simply put, a reverse mortgage is a loan that enables homeowners who are age 62 or older to convert a portion of their home’s equity to the lender in return for cash. When choosing a reverse mortgage, the borrower will be given the option to receive cash value of the equity in the form of a lump sum or in monthly distributions. The loan is then repaid to the lender when the borrower or their heirs sell the property.
For many seniors, reverse mortgages have become a useful retirement planning tool, solving a spectrum of needs, including:
- Providing supplemental retirement income;
- Covering daily living expenses;
- Paying for health care or caregiver expenses;
- Repairing or modifying a home;
- Paying off debts;
- Covering property taxes;
- Preventing foreclosure.
What conditions must be met to qualify for a reverse mortgage?
To qualify for a reverse mortgage, you must:
- Be at least 62 years old;
- Have enough resources or income to pay any ongoing costs, which include property taxes, utilities, HOA fees and home insurance;
- Be able to manage the continued ongoing general maintenance of the home, including roof replacement, water heater, heating and A/C systems, appliances, etc.
- Be current on your property taxes and hazard premiums.
- Not be delinquent on any federal debts.
- Be using the reverse mortgage for your primary residence.
What are some of the most common ways to use a reverse mortgage?
Reverse mortgages can be used in a variety of ways:
- Supplemental Income. The monthly proceeds of a reverse mortgage can supplement income.
- Monthly Expenses. A reverse mortgage can cover unexpected monthly expenses or simply make life more comfortable.
- Fill the Gap until Social Security. A reverse mortgage line of credit can fill the gap between age 66 and 70 with tax-free income, and let 401(k) and other assets remain untouched during that time frame.
- Financial Security. A powerful feature of a reverse mortgage is the line of credit. This line of credit can replace lost income for a senior who has lost a job and is seeking another before drawing on Social Security and other benefits.
- Caregiving. According to research, most seniors prefer to stay in their home during retirement. Proceeds from a reverse mortgage can assist with the cost of long-term home care.
How much can you get with a reverse mortgage?
Several factors determine how much money you can get through a reverse mortgage:
- Your age (or, in the case of couples, the age of the youngest spouse);
- Your home’s value;
- Interest rate;
- Lesser of appraised value or the HECM FHA mortgage limit of $726,525.
Usually, you can take up to 60 percent of your initial principal limit in the first year of a reverse mortgage.
What are some important things to know about a reverse mortgage?
The most important thing to note is that by opting for a reverse mortgage, you are decreasing the amount of available equity in your home. That can mean that there may come a point when there may not be any inheritance left from the home to pass on to your heirs. However, the pressures of being able to pay off all of your bills may be a priority over equity preservation.
Leveraging a reverse mortgage can be a smart move for many older borrowers looking to establish a cost-effective route to retirement security. For those who don’t want to accumulate additional credit card debt, or rely on their adult children for supplemental income to cover basic living expenses, a reverse mortgage could be the answer. When you consider the soaring home prices that have given many residents large amounts of equity to work with, it may not be such a bad idea to use a reverse mortgage in lieu of more expensive financing options. Not to mention that, unlike home equity lines of credit, reverse mortgages do not require the borrower to repay principal or interest until the sale of the property and can never be frozen by the lender.
If you feel that converting some of your home’s equity into supplemental income via a reverse mortgage could be a viable option, contact us to learn more.
A reverse mortgage increases the principal mortgage loan amount and may result in negative equity. Minimum age is 62. When the loan is due and payable, some or all of the equity in the property no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. Charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees, all or any of which may be added to the balance of the loan. The loan balance grows over time and interest is charged on the outstanding balance. Interest on a reverse mortgage is not tax-deductible until the loan is partially or fully repaid. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). Failure to pay these amounts may subject the property to a tax lien or other encumbrance or to possible foreclosure. Borrowers must occupy home as primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. This material is not provided by, nor was it approved by HUD or FHA, or any government agency. If you are in any doubt as to the suitability of a product or service that you are intending to purchase, or any aspect of your personal finances, we recommend that you seek independent financial advice first. Rates, terms, and availability of programs are subject to change without notice. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster (https://entp.hud.gov/idapp/html/hecm_agency_look.cfm) or call (800) 569-4287.