Reverse mortgages offer seniors a way to use the equity in their homes to help finance their retirement. With people living longer, reverse mortgages can provide income when retirement savings aren't enough to cover living expenses.
Also known as Home Equity Conversion Mortgages, or HECM's, reverse mortgages allow seniors to sell part of the equity in the home in order to get cash, without having to sell the home or take out a home equity loan.
With a reverse mortgage, instead of making mortgage payments to a lender every month, the mortgage lender sends you money every month. You don't have to pay the money back for as long as you live in your home.
Naturally, you must repay the reverse mortgage at some point: when you die, when you sell the house, or when you no longer live in the house as your principal residence.
Most reverse mortgages require that you be at least 62 years of age, and live in the home.
Types of reverse mortgages:
There are three types of reverse mortgages: single purpose reverse mortgages; federally-insured reverse mortgages; and private reverse mortgages.
A single-purpose reverse mortgage can only be used for one purpose specified by the government or a non profit lender. Some of the allowable purposes include home repairs, home improvements, or property taxes. Single-purpose reverse mortgages have very low costs associated with them, and are usually available only to those with low or moderate incomes.
Federally-insured reverse mortgages are called Home Equity Conversion Mortgages (HECM's), and are backed by the U.S. Department of Housing and Urban Development (HUD). Because of the relatively high costs associated with HECM's, they are best suited for those who intend to stay in their homes as long as possible.
To qualify for an HECM, you must first consult with a federally-approved housing counselling agency. The counselor will explain the costs, the financial implications, and the alternatives to reverse mortgages.
The amount of money that you can receive from an HECM depends upon your age, the type of reverse mortgage you choose, the value of your home, current interest rates, and other factors. Generally speaking, the amount you can receive will be higher if you have a lot of equity in your home. Also, your age will impact the amount you can receive; the older you are, the more you will likely receive.
If you qualify for an HECM, you have several options as to how you will receive your payments. You can choose a fixed monthly payment over a specific period of time, or for as long as you live in your home. You can also set up a line of credit, from which you can draw funds from the loan proceeds at any time, and in whatever amounts you choose.
Private reverse mortgages are very similar to government-run HECM's. The difference is that the money is being borrowed from a private lender, and the costs may be higher than government HECM's. However, those who own higher-valued homes may find that they will qualify more easily for a reverse mortgage going through a private lender, and may also get more money from the reverse mortgage than if they went with a government HECM.
Features of Reverse Mortgages:
You paid for your home with the the money you had left in your paycheck after taxes. Therefore, the loan payments you receive from a reverse mortgage are not treated as taxable income. This means that the payments will not affect your Social Security or Medicare benefits.
While a reverse mortgage means that you are borrowing against your home, you still retain the title to the home. However, because you retain the title to your home, you're still responsible for repairs, property taxes, utilities, and other expenses, just as you would be with a conventional mortgage.
Reverse mortgages involve closing costs, so be sure to interview several lenders to make sure that you're getting the best deal.
A reverse mortgage means just what the term suggests: instead of the amount of money you owe on your home declining over time, the amount of money you owe on your home increases over time.
How much can the amount you owe increase to? A "nonrecourse" clause is contained in nearly every reverse mortgage. The clause prevents you or your estate from owing more than what your home is worth when the loan is repaid.
One obvious disadvantage of a reverse mortgage is that, in the end, you are left with little or no equity in your home. You won't have anything from your home to pass on to your heirs, or to use if you should go into a retirement home or assisted living.
