It happened again.The clock struck 10:00 AM EDT this morning and I jumped over to Freddie Mac’s site to see what this week’s Primary Mortgage Market Survey had to say. After refreshing the site feverishly for a couple minutes because I’m a geek like that, I took a look at the numbers. I thought I was hallucinating by looking at how crazy low the numbers were, so I had to rub my eyes to make sure I wasn’t seeing things.
One of the most confusing mortgages to much of the general public is the reverse mortgage (commonly called HECM by FHA or HUD). Lots of folks aren’t sure what a reverse mortgage is, who qualifies, how to apply, and where to go to get information.
These are all great questions and here we’ll explain how a reverse mortgage is different from regular mortgages and explore some of the pros and cons of reverse mortgages.
First, what exactly is a reverse mortgage?
A reverse mortgage is easier to understand if you compare it to a traditional mortgage or more accurately a “forward mortgage”.
A forward mortgage is the kind of mortgage you’ve known about all of your life and it’s what you use to buy a home. The way it works is simple – debt is created against your home when you receive the loan and you pay money to a lender (usually monthly – aka your monthly payment) to decrease that debt. As time goes on and you make monthly payments, your debt decreases and your equity in your home increases.
A reverse mortgage, on the other hand, works just the opposite. You receive money using the equity from your home and you don’t have to make monthly payments. As time goes on, your debt increases and your equity decreases. The minimum age to qualify for a reverse mortgage is 62 years old.
The Pros of a Reverse Mortgage
- The most obvious benefit is that no repayment of the reverse mortgage is required until you no longer occupy the home as your primary residence. And since no monthly mortgage payments are required, your income is not a qualifying factor for reverse mortgages!
- If your loan balance increases, it can never exceed the value of your home since how much you get is a percentage based on the value of your home. This means you can never lose your house and you’ll never owe more than what your home is worth at the time the loan is paid.
- The money you receive is tax-free* and there is no debt left to your heirs or estate.
- Proceeds from the loan are not considered income and therefore, will not affect Medicare, Social Security, Medicaid or Supplemental Security Income (SSI).
The Cons of a Reverse Mortgage
- Reverse mortgages can never be on a second home or vacation home. It must be on your primary residence. Also, you may not rent out any part of your home.
- If you need to borrow a large percentage, say 80% of your home’s value, you would have to get a conventional “forward mortgage” since the amount you receive from a reverse mortgage is a percentage based on your age. So, for example, if you’re 75 years old, you can only borrow 65% of the value of your home. To borrow as much as 80%, you’d have to be 90 years old.
- Interest rates and costs may be higher than a conventional mortgage, which may offer more options.
Reverse mortgages are a great way for many seniors and retirees to supplement their income. As with all mortgages, the best program depends on your individual situation. You should always do as much research as you can to find out which loan is best for you.
*As always, please consult your tax advisor before you make any financial transactions that affect your taxes.