What is a Reverse Mortgage?
A reverse mortgage is a loan available to homeowners who are 62 years or older, allowing them to tap into their equity to have access to tax-free cash. The lenders are not required to pay back the loan for as long as they are living in the house. This loan is called a reverse mortgage as the lender makes payments to the borrower against the equity of the home as against a conventional mortgage where the borrower pays monthly payments to the mortgage lender.
In the backdrop of mounting expenses such as home repairs, daily living expenditures and medical care, many senior citizens find it difficult to cope up with their fixed, minimal income. For many senior Americans, this opportunity is very alluring. But is reverse mortgage always the best option for senior citizens? There are definitely certain advantages as reverse mortgage policy allows them to have easy access to tax-free cash without selling their homes and no liability of monthly payments until they are living or sell their house. But there are some risks involved too. Let’s look at some benefits and risks more closely.
When do you qualify for a reverse mortgage?
1. You must be 62 years of age or older
2. You must own the home and have considerable equity in the home
3. You must own the home as your primary residence
4. Your property type must be either single family home or 2-4 unit home; manufactured home. HUD approved condominium or townhouses.
5. Your property type should meet all FHA property standards and flood and hazard requirements.
Benefits of a Reverse Mortgage
1. It allows you to convert a part of the equity in the home into cash and as long as the home is your main residence, you don’t have to repay the loan. It only needs to be paid back if the last surviving borrower passes away or sells the house.
2. No burden of monthly payments during span of the loan. All accumulated monthly costs including mortgage insurance premiums, interest charges, and mortgage owner service fees are only due after the loan is paid off.
3. Reverse mortgage usually does not impact Social Security or Medicare benefits.
4. Income from a reverse mortgage is not taxable.
5. If the house sells for less amount that what was borrowed, the mortgage lender can’t go to your heirs for the loan repayment.
6. Upfront costs and interest rates can be included in reverse mortgage instead of paying them in the beginning.
7. With most reverse mortgage programs, you can use the money for any purpose such as towards home improvement or maintenance, medical bills or long-term care.
Risks Involved in Reverse Mortgage
1. A reverse mortgage is a rising loan and you will be responsible to pay the interest on insurance premiums, lender’s services fee, closing costs and property taxes which keeps adding up over time. As your loan accrues, your equity in the home decreases.
2. The principal, accrued interest charges and services fees etc. must be paid to the lender before your heir can gain back the title of the property. If the heirs can’t repay the debt, the lender can foreclose and sell the property.
3. You may lose your eligibility for Medicaid and Supplementary Security Income (SSI).
4. You can lose your property if you have to live in a care home or a nursing home for a prolonged period. Even if you intend to return, there are heavy costs of healthcare to consider besides the accruing debt.
5. Upfront costs and the interest rates are usually much higher than for conventional mortgages or other equity loans. These costs keep adding up and are often paid out of the home’s equity, decreasing the amount of cash or the equity in your home.
You need to carefully weigh your pros and cons before you decide to take out a reverse mortgage program. Explore your options with a reverse mortgage counselor and discuss all the details and consequences with your family members.