What is a reverse mortgage?
In plain English, a reverse mortgage is nothing more than an equity loan secured by your home designed to defer repayment. It’s really that simple.
The most common type of reverse mortgage is the HECM, which is the acronym for Home Equity Conversion Mortgage. This program was created by the Federal Housing Administration in 1988. While a traditional home mortgage requires the homeowner to make scheduled monthly payments over a specified term, (usually 30 years) the reverse mortgage interest is not due until the loan reaches maturity. As long as the homeowner still resides in their property and pays their property taxes and insurance they can take advantage of not making monthly payments on the money they borrowed.
You own your home.
With a reverse mortgage you continue to own your home, paying your property taxes and homeowners insurance just as before. Like any mortgage, you will receive a monthly statement which will outline all interest charges and balance information. The only difference will be the absence of a coupon to return your monthly payment as no payment is necessary.
What are the qualifications?
Reverse mortgages are available to all US citizens and Permanent Residents age 62 or older with substantial equity in their home. The maximum loan amount you may qualify for is based on the youngest homeowner’s age, current rates, and home value. There is no income or credit score requirements as there are no monthly repayments. You must continue living in your home as your primary residence and continue to pay your properties taxes and insurance.
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You’re in the driver’s seat.
You can choose to make voluntary repayments of the mortgage interest in part or full without penalty. That’s right; you can make payments back on your reverse mortgage. You can also deduct that mortgage interest just as you would a traditional home loan and you can pay off the entire loan at any time with cash, refinancing or selling. Some believe that once you get a reverse mortgage the bank will eat all of the homes equity leaving your heirs with nothing but a mound of debt. Wrong. While no one can predict your homes appreciation, you can rest assured that your heirs have no recourse to the reverse mortgage you took.
How is the loan repaid?
Unless repaid voluntarily, the reverse mortgage is not due until the last surviving borrower passes away or fails to occupy the property as their primary residence. The heirs will have ample time (up to 12 months) to complete a sale or refinance transaction to pay back the balance of the loan. If your heirs choose not to act, the reverse mortgage lender will have no choice but to foreclose on the home. In the event that the sale of the property does not yield sufficient funds to pay off the balance of the loan, the government insurance that you would have paid for as a part of closing your reverse mortgage loan will cover your estate. The Lender will be reimbursed for any shortfall from the mortgage insurance fund.
Who is it for?
Anyone who has desires or needs that cannot be met with their current income levels. Reverse mortgages are a great tool to help you stay in the home you love or to simply enhance your retirement years.
Who is it NOT for?
Because there are typical costs associated with setting up a reverse mortgage, (appraisal and origination charges) it is not recommended for people who do not intend to live in their home for a reasonable amount of years to realize its benefits.
What about taxes?
Cash received by any mortgage is not considered income and will not be taxed.
The Federal Housing Administration wants you to fully understand the reverse mortgage and requires that all applicants receive independent 3rd party counseling by phone or in person. Once the counseling is completed you will receive a certificate of completion which is then signed and delivered to your lender of choice.
Resource: View a list of counseling agencies here.
Even though reverse mortgages do not affect public benefits such as Social Security and Medicare, the cash proceeds can impact eligibility for those who are receiving “needs based” state or local assistance.
This is not specific to a reverse mortgage but as to any excess funds that could change the qualifications on these types of programs. Like any mortgage it pays to shop around. Compare offers from both banks and brokers alike and don’t be fooled by the common sales pitch “they’re all the same” or “we service our own loans”.
The fact of the matter is ALL reverse mortgages carry the same safeguards, and there is only one federally insured HECM so don’t settle for less money or higher interest charges.
All Reverse Mortgage® is an Award-Winning HUD Approved Direct Lender. If you have a question about reverse mortgages give us a call Toll Free (800) 565-1722 or request your informational guide and personal quote.