Even the safest and best-advised financial moves have pros and cons and the Reverse Mortgage is no exception. Many seniors are enthralled by the Home Equity Conversion Mortgage (also known as a Reverse Mortgage), a special financing option which is taking the country by storm. While Reverse Mortgage lenders promise that the process of obtaining a Reverse Mortgage is safe and practically risk-free, senior advocates are more cautious. They advise that Reverse Mortgages are a good financial move in specific circumstances but urge retirees to review the HECM terms carefully and negotiate with the lending institution to make sure that the options offer the borrower(s) the best possible return for their money.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan which allows seniors aged 62 and older to access the equity that they hold in their homes without having to pass credit or income requirements. To qualify for a reverse mortgage, an individual must own his or her own home (or have paid off enough of the mortgage that will allow the funds from the loan to cover the remainder of the loan) be at least 62 years old and occupy the home as the principal residence.
In a reverse mortgage, a senior homeowner takes a loan against the principal amount of the home, but does not become obligated to make payments against the loan. Loan funds may be drawn in the form of fixed payments or a line of credit. As the homeowner receives his payments his equity in the home decreases.
The loan payments are not due during the homeowner’s lifetime so the home reverts to the ownership of the lending institution after the homeowner leaves the house or dies. The lending institution then sells the house and recoups the investment.
Why a Reverse Mortgage Might be the Solution for You
- Reverse Mortgages Provide A Source Of Income – When you take equity out of your home through a HECM loan you can receive your funds via a line of credit or monthly payments. This allows seniors who are living on a fixed income to supplement their existing income and use the additional funds at their discretion.
- Tax Benefits – The income from a reverse mortgage qualifies as a loan and the proceeds are generally tax free. The income from a Reverse Mortgage is not calculated into an individual’s Social Security or Medicare benefits. It is wise, however, to consult a senior advocacy organization for more specifics about the implications of taking out a reverse mortgage, specifically in relation to Medicaid payments.
- You Will Never Owe More Than The Home’s Value – Regardless of price fluxes, market changes or real estate booms and busts, you will never owe the lender more than the home is worth. Even if you end up receiving more in payments than the value of the home, as long as you maintain your loan obligations and continue to live in the home, the loan will continue to pay you at the agreed-upon rate.
- Title Retention – The title to the home remains in your name throughout the course of the loan.
Reverse Mortgage Obligations.
- Fees – When you take out a Reverse Mortgage you are responsible for the origination fees, closing costs and other third party fees. These fees can equal several percentage points of the home’s value.
- Counseling Requirement - Loan applicants must participate in a HECM counseling session with a HUD-approved counselor as a pre-requisite to obtaining the loan. This requirement was instituted to make sure the homeowner is fully informed about all the aspects of the Reverse Mortgage loan.
- Interest Rate – The loan carries an interest rate which must be paid monthly. This rate could rise over the course of the loan.
- Taxes And Home Owner’s Insurance – Homeowners are responsible for paying homeowner’s insurance and property taxes. Failure to make these payments could lead to foreclosure.
As always, it is advised that you consult a professional tax attorney, estate planner or retirement professional before making a decision about a Reverse Mortgage. Many senior advocacy organizations offer free counseling for potential HECM borrowers and other individuals who are planning their retirement income.