Knowing Your Options: Reverse Mortgages
What is a Reverse Mortgage?
A reverse mortgage is a loan available to homeowners aged 62 or older that allows them to convert part of the equity in their home into cash. Unlike a traditional mortgage where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the borrower. The loan is repaid when the borrower sells the home, moves out permanently, or passes away. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
Benefits of a Reverse Mortgage
Supplement Retirement Income:
Reverse mortgages provide a steady source of income for retirees, helping to cover living expenses, medical bills, and other costs.
No Monthly Mortgage Payments:
Borrowers are not required to make monthly mortgage payments, which can relieve financial stress. They are, however, responsible for property taxes, homeowner’s insurance, and maintenance.
Flexible Payout Options:
Borrowers can choose how they receive the loan proceeds: as a lump sum, monthly payments, a line of credit, or a combination of these options.
Non-Recourse Loan:
Reverse mortgages are non-recourse loans, meaning that the borrower or heirs will never owe more than the home’s value at the time of sale, even if the loan balance exceeds that amount.
Retain Home Ownership:
Borrowers retain ownership of their home and can continue living in it as long as they meet the loan requirements, such as maintaining the property and paying taxes and insurance.
Federally Insured:
HECM reverse mortgages are federally insured, providing protection to both borrowers and lenders.
Frequently Asked Questions About Buying a Home
Who is eligible for a reverse mortgage?
Homeowners aged 62 or older who own their home outright or have a significant amount of equity are eligible. The home must be their primary residence.
How is the loan amount determined?
The loan amount is based on the age of the youngest borrower, the value of the home, current interest rates, and the FHA lending limits.
Do I have to repay the loan while I am living in the home?
No, you do not have to make monthly mortgage payments. The loan is repaid when the home is sold, the borrower moves out permanently, or the borrower passes away.
Can I lose my home with a reverse mortgage?
As long as you comply with the loan terms, such as paying property taxes, homeowner’s insurance, and maintaining the home, you cannot lose your home. Failure to meet these obligations could result in foreclosure.
What are the costs associated with a reverse mortgage?
Reverse mortgages have various costs, including origination fees, mortgage insurance premiums, closing costs, and servicing fees. These can be financed into the loan.
How will a reverse mortgage affect my heirs?
When the loan becomes due, heirs can choose to repay the loan and keep the home or sell the home to repay the loan. Any remaining equity after repaying the loan belongs to the heirs.
Can I use a reverse mortgage to buy a new home?
Yes, the HECM for Purchase program allows borrowers to use a reverse mortgage to buy a new primary residence.
What happens if my home’s value decreases?
Since reverse mortgages are non-recourse loans, you or your heirs will not owe more than the home’s value at the time of sale, even if the loan balance exceeds that amount.
How are the loan proceeds taxed?
Loan proceeds from a reverse mortgage are not considered taxable income. They are loan advances and do not affect Social Security or Medicare benefits.
Can I pay off my reverse mortgage early?
Yes, you can repay the loan at any time without penalty. This can be done through refinancing, selling the home, or using other financial resources.
