Reverse mortgages are becoming increasingly popular in America. However, many are still unsure of what exactly they are, and who stands to benefit.
“It’s a buzz word,” said Dean Wegner, a mortgage expert. “‘Hey, I got a reverse mortgage,’ so they’re going with the flow, and I don’t know if everybody actually understands, completely understands a reverse mortgage.”
Older adults who are “house-rich and cash-poor” can benefit from the extra cash flow a reverse mortgage provides.
What is a Reverse Mortgage?
A reverse mortgage allows you to get extra cash each month without having to pay it back immediately or sell your home. In a regular mortgage, you pay your lender each month, and your debt decreases while your home’s equity increases.
With a reverse mortgage, the lender pays you each month and you’re not required to pay it back until you die, sell your home, or no longer live in the home as your primary residence.
Who Should Consider a Reverse Mortgage?
Simply speaking, a reverse mortgage allows older Americans an opportunity to convert part, or all, of the equity in their homes into cash.
“What happens, as a result, is that people outlive their assets,” said Richard Down, a reverse mortgage specialist at M&T Bank Central New York. “Doctors and medical technology are keeping a lot of people above the daisies…A reverse mortgage is a cash flow solution for senior citizens,” he said.
To qualify for a reverse mortgage, you must be at least 62 years old, live in your home, and own it. The loan is generally tax-free and can be used however you like, to finance a home improvement project, supplement retirement income, pay for health care bills, etc.
Seniors who are choosing reverse mortgages are typically “house-rich and cash-poor,” and the mortgage gives them the extra cash they need after retirement.
How Does it Work?
If you decide to get a reverse mortgage, the cash can be paid to you in a lump sum, as a monthly cash advance, as a “credit line” account that lets you decide how much is paid out, or a combination of the above.
When the debt becomes due — either because you die, sell your home, or no longer live in it primarily — you may owe a large amount, so you may receive little or no equity from your home.
However, you can never owe more than the value of your home at the time the loan is repaid. Reverse mortgages are usually “nonrecourse,” meaning that the lender only has rights to your home (not your income, other assets, or income of your heirs).
If the loan needs to be repaid because of death, your heirs can either pay it back using their own funds, by selling your home, or by selling other assets from your estate.
Three Types of Reverse Mortgages
Payment is not due on a reverse mortgage until you sell your home, die, or no longer live in it as your primary residence, but be aware that by this time there may not be much (or any) equity left from your home for you or your heirs.
Here is a breakdown of the three basic types of reverse mortgages you’re likely to encounter:
1. Single-purpose reverse mortgages:
Offered by some state and local government agencies and non-profit organizations, these mortgages generally have low costs. However, they’re only available in some areas, you generally need a low to moderate-income to qualify, and they must be used for a specific purpose, which is specified by the government or non-profit lender. They can be used for things like home repairs or improvements, or property taxes.
2. Federally-insured reverse mortgages:
These mortgages are called Home Equity Conversion Mortgages (HECMs) and are backed by the U. S. Department of Housing and Urban Development (HUD). They have no income qualifications and are widely available, but you must meet with a counselor from an independent government-approved housing counseling agency before applying for the loan.
3. Proprietary reverse mortgages:
Also widely available with no income restrictions, these reverse mortgages are private loans that are backed by the companies that develop them. Though you may be able to get a larger loan at a lower total cost from a HECM, if you own a high-value home, you may be able to get a larger loan advance using a proprietary reverse mortgage.
Some Things to Consider
Before you decide to cash in on your home’s equity, please be aware of these important facts from the Federal Trade Commission:
- Under the HECM program, the borrower is allowed to live in a nursing home or other medical facility for up to one year before the loan must be paid back.
- Your debt will increase over time, as interest is charged on the outstanding balance and added to the amount you owe each month.
- Lenders typically charge origination fees, closing costs, and, perhaps, other service fees for a reverse mortgage.
- A reverse mortgage can use up all or some of your home’s equity. This means you’ll have fewer assets left for yourself, or, upon your death, to leave to your heirs (however, you will not owe more than the value of your home when the loan is repaid).
- If you do not maintain homeowner’s insurance or pay your property taxes, the loan may become due.
Why You Should Put Off Getting One and Other Tips
Your home is more than your castle, it’s your ace in the hole.