Reverse mortgages are financial instruments that allow homeowners, typically seniors, to tap into their home equity without selling their home. They provide a unique way for retirees to enhance their income streams, manage financial shortfalls, or even fund large expenses.
A reverse mortgage is a type of loan available to homeowners aged 62 or older who have significant equity in their homes. It allows these homeowners to borrow against the value of their home and receive funds as a lump sum, fixed monthly payments, or a line of credit. Unlike traditional mortgages, the borrower does not need to make monthly payments to the lender; instead, the loan is repaid when the borrower moves out, sells the home, or passes away.
In a reverse mortgage, the homeowner converts part of their equity into cash. This loan is unique because the homeowner retains title to their home and does not have to make monthly payments. Instead, interest accrues on the loan amount, which is added to the balance over time. The loan balance grows, while the home equity decreases.
The loan becomes due and payable under conditions such as the borrower's death, a move, or the sale of the home. It's important to note that the borrower must continue paying property taxes, homeowner's insurance, and maintenance costs to avoid defaulting on the loan.
Reverse mortgages offer several payment options:
To qualify for a reverse mortgage, applicants must meet several criteria:
Property types generally eligible include single-family homes, 2-4 unit properties with one unit occupied by the borrower, HUD-approved condominiums, and manufactured homes that meet FHA requirements.
There are different reverse mortgage programs, each designed to meet different financial needs and circumstances. Understanding the types of reverse mortgage loans can help seniors choose the most suitable option for their situation. Here are the primary types:
Home Equity Conversion Mortgage (HECM). The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is federally insured by the U.S. Department of Housing and Urban Development (HUD). HECMs allow seniors to tap into their home equity and choose from multiple payment options, including lump-sum payments, monthly advances, or a line of credit. The main benefits of HECMs include flexible disbursement options and high borrowing limits, but they come with mandatory counseling to ensure borrowers understand the terms and risks.
Proprietary Reverse Mortgage. Also known as a jumbo reverse mortgage, a proprietary reverse mortgage is a private loan not insured by the federal government. They are best for homes with higher values that exceed the federal limits set for HECMs. Proprietary reverse mortgages can provide larger loan advances making them a favorable option for homeowners with higher-value properties.
| Advantages | Disadvantages |
|---|---|
| Additional Income Provides a steady flow of income or a lump sum. | Reduction in Equity The homeowners' equity is reduced. |
| No Monthly Mortgage Payments Borrowers don't have monthly mortgage payments. | Fees and Interest These loans can have high upfront costs. |
| Flexible Use of Funds Can be used for various purposes. | Impact on Heirs Less inheritance for the borrower's heirs. |
| Non-Recourse Loan Borrowers will never owe more than the home's value. |
Choosing a lender is a critical decision in the reverse mortgage process. Consider the following when selecting a lender:
Reverse mortgages can be a viable solution for many seniors looking to improve their financial situation in retirement, but they require careful consideration of the advantages, potential drawbacks, and personal circumstances before proceeding. To learn more or to see how much you can qualify for, please contact a reverse mortgage advisor today. Our advisors are available 7 days a week to assist you. We offer reverse mortgages in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Texas. This material is not from HUD or FHA and has not been approved by HUD or a government agency.
Kathleen Romeo
Licensed Mortgage Originator
Phone: (201) 232-9766
Email: [email protected]
NMLS 85239
You can also click here to have one of our reverse mortgage advisors give you a call today. If you are interested in applying for a reverse mortgage, you can apply online now.
It might. Proceeds from a reverse mortgage could impact eligibility for means-tested programs such as Medicaid. However, it generally does not affect Social Security or Medicare benefits.
Yes, alternatives include home equity loans, home equity lines of credit, and downsizing to a more affordable home.
Yes, you can still qualify for a reverse mortgage even if you have an existing traditional mortgage. However, you must use the funds from the reverse mortgage to pay off the existing mortgage. This is because the reverse mortgage requires that you hold no other liens on the property.
The money received from a reverse mortgage is typically considered loan advances and not taxable income. This means you won't have to pay income tax on the amounts you receive. However, it's always a good idea to consult with a tax advisor to understand your specific situation.
Interest on a reverse mortgage accumulates over the life of the loan and is compounded. The interest is not paid out of pocket but is added to the loan balance each month. Therefore, the amount you owe grows over time as interest on the loan and fees continue to accumulate.
If you sell your home, the reverse mortgage must be repaid at the time of sale. Typically, the proceeds from the sale of the home are used to repay the reverse mortgage, along with any accumulated interest and fees. Any remaining equity belongs to you or your heirs.
Yes, a reverse mortgage can be refinanced if it benefits the borrower. Reasons for refinancing may include decreasing interest rates, increasing home value (leading to more available equity), or the introduction of new reverse mortgage products that might offer better terms.
Reverse mortgages are "non-recourse" loans, which means that you or your heirs will never owe more than the home is worth at the time the loan is repaid. If the balance of the reverse mortgage exceeds the home's value, the loss is typically covered by federal insurance if your reverse mortgage is a federally insured Home Equity Conversion Mortgage (HECM).
