- Reverse mortgage converts your home equity into tax free income.
- Reverse mortgage have high upfront costs and will reduce the amount of equity you own over time.
- There are 4 types of reverse mortgage: Single-purpose reverse mortgage, HECM, HECM for purchase, and proprietary reverse mortgages.
Reverse Mortgage - Understanding and Evaluating the Pros and Cons to Make a Smart Loan Decision
What is a Reverse Mortgage?
In a regular mortgage, you make monthly payments to the lender. But, in a "reverse" mortgage, you receive money from the lender and generally do not have to pay it back for as long as you live in your home. Instead, you are only responsible for paying the property taxes, homeowners insurance, and any required home maintenance costs. The reverse loan balance must be repaid when you die, sell your home, or when your home is no longer your principal residence.
The amount of money you can receive in a reverse mortgage depends on your age, the home value, and the current interest rate. Generally, the older you are, the higher the home value, and the lower the interest rate, the more money you can receive. In short, reverse mortgages can help homeowners who are house-rich but cash-poor; they have become an important resource to our senior population.
Advantages & Disadvantages of Reverse Mortgage
| Advantages | Disadvantages |
|---|---|
| Tax free income as a lump sum, monthly payments, and/or line of credit | Can be expensive due to high up front costs |
| Funds may be used for any purpose | Reduces equity to pass on to heirs |
| Own and remain in your home | Product can be confusing |
| No monthly payments to the lender | May impact Medicaid benefits (not Medicare) |
| Can never owe more than the value of your home at repayment | |
| Does not affect Social Security or Medicare benefits | |
| Pays off an existing mortgage, leaving no monthly mortgage payments |
Types of Reverse Mortgage
| Type | Description |
|---|---|
| Single-purpose reverse mortgage | Reverse mortgages offered by some state and local government agencies and nonprofit organizations to be used for a single purpose such as home renovation or to pay off property taxes. This type of loan generally requires low to moderate income to qualify. |
| Home Equity Conversion Mortgages (HECMs) | A federally insured HUD product that is the most popular option for seniors. There is no limitation on the use of funds and HECMs are available in all states. |
| HECM for purchase | A reverse mortgage that allow seniors to use the proceeds to purchase a new home. This is a great option for seniors who are looking to downsize into a new, smaller home. |
| Proprietary reverse mortgages | Reverse mortgages issued by commercial mortgage lenders. These mortgages may carry a higher loan limit than HECM, but are not federally insured and are often more costly than HECM. |
Some of the facts to keep in mind about these loans:
- Lenders not only charge origination fees and other closing costs for a reverse mortgage but may also charge servicing fees during the term of the mortgage.
- The amount you owe on a reverse mortgage generally grows over time. Interest is usually a variable rate, is charged on the outstanding balance, and is added to the amount you owe each month.
- Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs.
- Because you retain the title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses.
- Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
There are enough potential pitfalls in reverse mortgages that in the case of an HECM, HUD requires that you meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan's costs, financial implications, and alternatives. This is a tremendous resource. Shop the loan market all you want, but take what you find to a counselor who can walk you through all your options and help you compare them, side by side.
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