What Is a Reverse Mortgage?

What Is a Reverse Mortgage?

If you’re age 62 or older, own your own home, and are searching for different ways to fund your retirement, securing a reverse mortgage may be the answer for you. A reverse mortgage is a financial product that enables you to easily convert the equity in your home into usable cash.

Therefore, whether you need the financial means to pay off your current mortgage or cover substantial healthcare expenses, a reverse mortgage can give you a line of credit minus the need to repay a monthly loan or provide you with fixed monthly payments.

Here’s a brief outline concerning both the pros and cons of getting a reverse mortgage and if it’s right for you.

How Do Reverse Mortgages Work?

It’s likely you bought your home with a ‘forward’ or standard type of mortgage, wherein you make regular payments each month to a financial lender. However, in the case of a reverse mortgage, the lender gives you monthly payments instead, and gradually buys the equity in your home. But, you still hold your property’s title that serves as security for the course of the loan. The loan is paid in full and the property is no longer your primary residence if you pass away or sell the home.

  • Reverse Mortgage: The equity in your home decreases and your debt increases.
  • Forward Mortgage: The equity in your home increases and your debt decreases.

Types of Reverse Mortgages

There are basically three types of reverse mortgages:

1. Single-Purpose Reverse Mortgages

This specific kind of mortgage is offered by local, state, or nonprofit organizations and is considered the most cost-effective approach of the three. The local or state government or the nonprofit organization specifically identifies the purpose of the reverse mortgage and can therefore only be used for such purposes.

2. Home Equity Conversion Mortgages

HECM, or home equity conversion mortgages, are federally-insured type mortgages that are supported by HUD (Department of Housing and Urban Development) in the U.S. It’s likely that an HECM costs more than a standard home loan and usually carries higher upfront costs as well. But, it’s the most widely used kind of reverse mortgage since it doesn’t carry any medical requirements or income restrictions, and can be used for virtually any purpose.

3. Proprietary Reverse Mortgages

A proprietary reverse mortgage is often used for homes appraised at much higher values and can thus offer larger advances. The ones with lower mortgages are eligible for greater funds.

Reverse Mortgage Pros

  • No matter how you receive the cash, usually you’re not obligated to pay it back as long as you’re living in the home as your primary residence.
  • Typically, you can choose the way you receive the cash: one lump sum, a line of credit where you can specifically decide how much and when the cash is paid to you, a standard monthly cash advance, or any combinations of these.
  • Cash advances are usually nontaxable.
  • There’s no set required minimum income in order to qualify since you’re not required to make a monthly repayment.
  • Cash advances usually don’t impact your Medicare or Social Security benefits.
  • According to the FTC (Federal Trade Commission) if you receive a higher number of payments than what your home is actually worth (for example, you outlive the loan), you’re free from owing more than the home’s overall value.
  • You get to keep the title to your home and remain its legal owner.
  • Once your home is sold and all the lending fees are paid in full, the remaining equity in your home goes straight to you or passed down to your heirs.
  • If you have an HECM, you can live in an assisted living facility as long as a year before your loan is due.

Reverse Mortgage Cons

  • You must be age 62 or older to qualify.
  • You must pay for and go through mandatory counseling regarding mortgages.
  • Over time, your debt increases since interest keeps adding to the balance of the loan.
  • Closing costs and loan origination fees are often expensive. However, they can be financed by rolling them into the total cost of loan.
  • Reverse mortgages consume your home’s equity and leave both you as well as your heirs with fewer overall assets.
  • During the life of the mortgage, you could possibly be charged with monthly servicing fees.
  • There are restrictions on how much money you can borrow throughout the first year in addition to how large a mortgage you can secure.
    The majority of reverse mortgages are actually variable interest rate loans that are tied to short-term indexes.
  • If you fail to properly pay your homeowner’s insurance or property taxes, the loan can quickly become due.
  • You’re not allowed to deduct any interest until the loan is paid in full.

Like any other financial tool, it’s in your best interest to thoroughly go over all the details first before making a final decision. Carefully weigh the pros and cons before securing a reverse mortgage for your home in order to protect your family as well as your assets.