Reverse Mortgages are becoming quite popular today. A Reverse Mortgage can give seniors greater financial security. Many older Americans use it to supplement social security, meet unexpected medical expenses, make home improvements, and more.
Whether seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses, many older Americans are turning to "reverse mortgages". They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.
In the past 10 years, public tax policies have made it easier for individuals with moderate
incomes to save and invest a portion of their income for retirement. However, for most
individuals who have already left the workforce, the single largest asset they have saved
is the equity value of their home. For some individuals, the income received from Social
Security and a pension is inadequate to meet their special needs. Conventional forms of
converting to income home equity involve repayable loans secured as second mortgages
or liens against ownership. Since 1989, the federal government has insured for adults age
62 and over a "reverse mortgage" that provides regular monthly payments without
repayment or the threat of eviction, even if the owner outlives the declining equity.
What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence.
What's the difference between a reverse mortgage and a bank home equity loan?
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes and other conventional payments like utilities, but with an Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."
Can the lender take my home away if I outlive the loan?
No! You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value.
Three Types of Reverse Mortgages
The three basic types of reverse mortgage are: single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECM), and are backed by HUD; and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.
How do I receive my payments?
You have five options:
1. Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
2. Term - equal monthly payments for a fixed period of months selected.
3. Line of Credit - unscheduled payments or in installments, at times and in amounts of borrower's choosing until the line of credit is exhausted.
4. Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
5. Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.
Loan Features
Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.
Reverse Mortgage Lender
If you are considering a reverse mortgage, shop around to compare your options and the offered terms. Learn as much as you can about reverse mortgages before you talk to a lender. It will help you ask more informed questions, which could lead to a better deal. No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.
Whether seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses, many older Americans are turning to "reverse mortgages". They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.