Reverse Mortgage
There are three types of reverse mortgages:
- Single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations
- Federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD)
- Proprietary reverse mortgages, private loans that are backed by the companies that develop them
Taking a loan to buy a home means borrowing a large sum from a bank and paying down that debt to increase equity and wealth in the home. With a reverse mortgage. the opposite is true. Instead of making payments, a reverse mortgage borrower uses the equity to gain income. Throughout the life of the loan the balance gets larger while the equity gets smaller.
- No repayment is made until the home is sold or the owner permanently moves out or passes away.
- Borrower will never owe more that the value of the home.
- No credit or income qualifications.
- Interest is paid at the time the loan is repaid.
- SS benefits and Medicare are not affected (consult a tax adviser).
- Borrower owns the home. The lender does not take control of the title.
- Closing costs and fees incurred can be financed as part of the loan.
When the loan is due, the heirs have choices. They can repay the loan and keep the house or sell the home and repay the loan.
Who Qualifies
Borrowers 62 and older for property they own and occupy.
Qualifying for a Reverse Mortgage
* The borrower must be 62 years old or older.
* The home must be your principal residence. In other words, it is where you live most of the time.
* You must own the home outright or have a small mortgage balance left.
* Single-family homes are eligible.
* Some condominiums and duplexes qualify, depending on lender policies.
* Mobile homes and cooperatives do not usually qualify.
If you meet these conditions, you will probably qualify for a reverse mortgage. Once approved by the lender, you can choose to have the money paid to you in a lump sum, in installments, or as a line of credit that you can use when you need it. There are no monthly payments required, which is a huge advantage for somebody on a fixed income. The homeowner retains the title to the property and is still responsible for property taxes and property maintenance.
Repayment
While the process is straightforward, you may be wondering who or how the loan is paid back with no monthly payments. The payments are not actually due until the last surviving borrower either passes away, sells the home, or moves out. Accordingly, the lender will not take possession of the property, unless the heirs don’t pay the balance of the loan. Most loan are then repaid by means of a traditional mortgage or by the selling the house.
Unique Features
The barrower of the reverse mortgage will never have to pay back more than the house is worth when the loan is due. For example: Let’s say you took a reverse mortgage for $100,000 and through the course of time, the house depreciated and is now valued at $50,000. When the time comes to pay back the loan only $50,000 needs to be paid back. The $50,000 left over remains with the borrower or estate. Alternatively, if the home is worth more due to appreciation when the loan balance is due, only the original balance $100,000, must be paid.
The loan income is not taxable and will not affect eligibility for Social Security or Medicare benefits. Supplemental Security Income and State Medicaid benefits are not affected as long as you spend the loan payments in the month you receive them.
A reverse mortgage is intended for use as a tool to supplement retirement income and offer some extra financial security to retirees. It benefits the homeowners, not the heirs to the estate. If you have your heart set on leaving your home to your family, the reverse mortgage is not a good option. If your main concern is improving your cash flow and being prepared for emergencies, the reverse mortgage can be very useful.
Contact us today to see if a Reverse Mortage is right for you.
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