What is a Reverse Mortgage?
Until recently, there were two main ways to get cash from your home: you could sell your home, but then you would have to move; or you could borrow against your home, but then you would have to make monthly loan repayments. Now a Reverse Mortgage gives you a third way of getting money from your home. What’s more you don’t have to leave your home or make regular loan repayments.
If you’re looking to take advantage of the equity in your home using a reverse mortgage, we can help you understand how it works and what you can expect moving forward. Call Consolidated Credit Counseling today at 1-800-435-2261 to speak with a HUD-certified housing counselor for free with no obligation.
What is a Reverse Mortgage?
A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. The money you receive from the loan can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you die, sell your home or permanently move out of your home.
Reverse Mortgage Eligibility
The following points are the requirements for homeowners:
- All owners of the home must apply for the reverse mortgage and sign the loan papers.
- All borrowers must be at least 62 years of age for most reverse mortgages.
- Owners generally must occupy the home as a principal residence (where they live the majority of the year).
In addition, there are some qualifications for the type of home that can be used for a reverse mortgage. Single family one-unit dwellings are eligible properties for all reverse mortgages. Some reverse mortgage programs may also accept 2-4 unit owner-occupied dwellings, along with some condominiums, cooperatives, planned unit developments and manufactured homes. Mobile homes are generally not eligible.
How Reverse Mortgages Work
Reverse mortgage loans typically require no repayment for as long as you live in your home. However, they must be repaid in-full, including all interest and other charges, when the last living borrower dies, sells the home or permanently moves away.
Since you don’t make monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your “equity”) generally grows smaller. However, you generally cannot owe more than your home’s value at the time the loan is repaid.
Reverse mortgage borrowers continue to own their homes – so there is no concern that your home won’t be yours. You will still be responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in-full.
What You Get with a Reverse Mortgage
A reverse mortgage can be paid to you all at once in a single lump-sum of cash, as a regular monthly loan advance or as a credit line that lets you decide how much cash to use and when to use it. You may also choose to use any combination of these payment options if different options would work better for you at different times.
The amount of cash you can get also depends on the specific reverse mortgage plan you select. The differences in available loan amounts can vary greatly from one plan to another. Most homeowners get the largest cash advances from the federally insured Home Equity Conversion Mortgage (HECM). HECM loans often provide much greater loan advances than other reverse mortgage options.
What You Pay on a Reverse Mortgage
The lowest cost reverse mortgages are offered by state and local governments. They generally have low or no loan fees. In addition, the interest rates are typically low to moderate as well. Private sector reverse mortgages from reverse mortgage lending companies tend to be expensive and include a variety of costs. An application fee usually includes the cost of an appraisal and a credit report. Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee. These costs generally can be paid with loan advances, which mean they are added to your loan balance (the amount you owe). Interest is charged on all loan advances.
Reverse mortgages are the most expensive in the early years of the loan, and then they become less costly over time. The cost can be very high in the short term; these mortgages are the least costly if you live longer than your life expectancy. The federally insured Home Equity Conversion Mortgage (HECM) is generally less expensive than other private sector reverse mortgages.
Consumers considering a private sector reverse mortgage as opposed to an HECM should carefully consider how much more it may cost before applying. Other articles in Reverse Mortgage Counseling section of this website provide more information on measuring and comparing the total cost of these loans.
Taxes, Estates and Public Benefits
Reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs and have an impact on the estate and heirs of the homeowner.
An American Bar Association guide states that generally “the IRS does not consider loan advances to be income.” The guide explains that if you receive SSI, Medicaid or other public benefits, loan advances are counted as “liquid assets” if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in your savings and checking accounts) are greater than these programs allow.