For retirees 62 or older, taking a Reverse Mortgage may be a wise financial move. A Reverse Mortgage can help finance a home improvement, pay off a current mortgage, supplement retirement income, pay for healthcare expenses or help the borrower move to a home that is in keeping with his/her new needs. Reverse Mortgages allow the borrower to convert part of the equity in his home into cash without having to pay additional monthly bills or sell the home.
Whereas in a “regular” mortgage the borrower makes monthly payments to a lending institution, in a “reverse” mortgage the borrower receives money from the lender and doesn’t have to pay it back for as long as she lives in your home. The reverse mortgage is repaid when the home is sold, the borrower dies or when the home is no longer the borrower’s primary residence. Proceeds of a reverse mortgage are tax-free and are not restricted by income.
Federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) are backed by the U. S. Department of Housing and Urban Development (HUD). They may be more expensive than a traditional home loan and the upfront costs can be high. If a potential borrower is planning to stay in his home for just a short time or borrow a small amount, a HECM loan may not be the best course of action, but for seniors who are looking for a long-term income source, the federally-insured Reverse Mortgage offers a strong and safe product. There are no income or medical requirements for a HECM loan and the proceeds from the loan can be used for any purpose.
Before applying for a HECM a potential borrower must meet with a counselor from an independent government-approved housing counseling agency. The counselor will explain the loan’s costs and financial implications and will help the calculate the expected revenue from the loan. A list of HUD-approved counselors is available through the agency at 1-800-569-4287. Counseling agencies generally charge around $125 for their services but a number of community housing programs offer the service for a reduced rate or even for free.
The loan applicant’s age, the appraised value of the home and the current interest rate determine the amount of money that a HECM loan will be worth. In general, the older the borrower is, the more equity s/he has in the home and the less s/he owes on it, the more money s/he can access through the loan.
There are several HECM payment options including
- a “term” option of fixed monthly cash advances for a specific time.
- a “tenure” option of fixed monthly cash advances for as long as the borrower lives in the home.
- a line of credit that lets the borrower draw loan proceeds at any time in amounts of his choosing until he has used up the line of credit.
- a combination of a line of credit and monthly payments
Some important points about Reverse Mortgages
· Reverse mortgage loan advances are not taxable and don’t affect Social Security or Medicare benefits.
· The borrower retains the title to her home. There are no monthly repayments.
· The loan must be repaid when the last surviving borrower sells the home, dies or no longer lives in the home as a principal residence. A borrower can be absent from the home for up to 12 consecutive months before the lending institution takes possession of the home to sell it and recoup its investment
· Origination fees for HECM reverse mortgages are dictated by law.
· The amount owed on a reverse mortgage grows over time. Interest is charged on the outstanding balance and is then added to the amount owed each month. That means the total debt increases as the loan funds are advanced and interest on the loan accrues.
· The borrower cannot owe more than the value of the home when the loan becomes due and the home is sold. If the borrower or the borrower’s heirs want to retain ownership of the home the loan must be repaid in full, even if the loan balance is greater than the value of the home.
- The borrower is responsible for property taxes, homeowner’s insurance, utilities, home maintenance, and other expenses. If these obligations aren’t met the loan may become due and payable.
Interest on a reverse mortgages is not deductible on income tax until the loan is paid off in part or whole.