What is a reverse mortgage?
As reverse mortgages have become more popular, senior citizens in increasing numbers inquire about the pros and cons.
There are several different kinds of reverse mortgages; however, most people are referring to HUD-guaranteed reverse mortgages (HECM). This article will address only those.
The reverse mortgage is a federally-insured, private loan available to senior citizens who own their home and reside in it.
Its proceeds can be used to supplement income, to meet unexpected medical expenses, to make home improvements, to receive and pay for long-term care at home instead of a long-term care facility, to travel or for almost any other purpose.
The reverse mortgage is a loan against the equity that has accumulated in the home, using that equity as security for the repayment to the bank.
Unlike conventional loans, there are no monthly payments ever to be made. Title to the property remains in your own name.
Interest accumulates on the money that has been borrowed and it is repaid in full upon the first of the following to occur: death, sale of the premises, or failure to maintain it as the principal residence.
The remaining equity in a home belongs to the owner, or to heirs if it the property is not sold until after death.
There are no income or credit qualifications.
To be eligible, all homeowners must be at least 62 years old and maintain the home as their principal residence. It must be owned free and clear or have a mortgage that can be paid off using the proceeds from the reverse mortgage. Single family to four unit dwellings and condominiums are all eligible.
The amount you are eligible to borrow depends on your age, the current interest rate, loan fees and appraised value of your home.
Only the amount you actually borrow is subject to interest accrual.
To protect senior citizens and to enable them to make an informed decision regarding a reverse mortgage, they are required to receive consumer education and counseling from a HUD-approved counselor.
The cash received from a reverse mortgage can be paid in several ways:
all at once, in a single, lump sum;
as a monthly cash payment;
as a "credit line" account that allows for the decisione when and how much of available cash is paid; or
as a combination of these methods.
Loan proceeds are not considered income and will not affect Social Security or Medicare benefits. Recent changes to the regulations used by the Department of Social Services have also allowed the loan proceeds to be considered exempt when applying for Medicaid.
A reverse mortgage is not for everyone.
If intending to move or sell a home within the next year or two, a reverse mortgage is probably not appropriate.
While some borrowers are hesitant due to the potentially high up-front costs such as Federal Mortgage Insurance, bank origination fees and title insurance, keep in mind these costs come from the proceeds of the loan, not out of pocket.
In addition, there are now loans available with drastically reduced up-front costs, making the decision much easier for some folks.
With a reverse mortgage, as with any loan or financial transaction, do the homework. Contact someone with knowledge in the area.
Call an elder law attorney, accountant or financial advisor. Make certain the one relied on for advice is truly versed in the particulars of a reverse mortgage and ask questions before committing to anything.