What Is a Reverse Mortgage?
A reverse mortgage (commonly called HECMs or home equity conversion mortgages by FHA or HUD) is easier to understand if you compare it to a traditional “forward mortgage”. A forward mortgage is what you use to buy a home. Debt is created against your home when you receive money for the loan and you pay money to a lender to decrease that debt. As time goes on, your debt decreases and your equity increases.
A reverse mortgage 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.
To qualify for a reverse mortgage, you must be 62 years old or more, you must have equity in your home and the home must be your primary residence. There are no income, employment or credit qualifications.
The amount you receive depends on your age and the value of the home. The older you are, the more money you’ll get from the reverse mortgage. The debt you owe equals all the loan advances you receive. In addition, interest will be added to your loan balance.
You can draw your money by receiving it in a lump sum, as a monthly cash advance, as a credit line type of account, or as a combination of these methods.
The fees that are charged on a reverse mortgage can be paid for with the money you receive from the loan. This is called “financing” the loan costs. However, since you are still the homeowner, you are still responsible for paying property taxes and home insurance.
Your reverse mortgage will become due and payable when the last surviving mortgage holder permanently moves out, sells the home or dies. It can also become due if you rent out any part of your home, declare bankruptcy, abandon your home, commit fraud, or the home becomes condemned.
The most obvious benefit is that unlike a home equity loan, no repayment of the reverse mortgage is required until you no longer occupy the home as your primary residence. And no monthly mortgage payments required means your income is not a qualifying factor.
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).
A reverse mortgage 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.
You may not qualify based on what you owe on your house or if you don’t meet the age requirement.
If you need to borrow a large percentage, say 80%, you would have to get a conventional “forward mortgage” in order to do so 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.
The loan processing may take much longer than a conventional “forward mortgage” because it is an FHA program. It may take up to 2-3 months to process.
Interest rates and costs may be higher than a conventional “forward mortgage” which may offer more options.
Reverse mortgages are a great way for many seniors and retirees to supplement their income. However, it’s not necessarily for everyone. 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.
- Talk to a Reverse Mortgage Expert at our reverse mortgage partner, One Reverse Mortgage.
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