What Is a Reverse Mortgage?

Senior Citizens' Financial Tool

A reverse mortgage allows you to convert a part of your equity in your home into capital, without having to pay additional bills. It does not require you to make repayments each month. The cash you receive is always tax-free. However, you are still liable for paying property taxes and homeowners’ insurance.

A reverse mortgage in simple terms is a loan. However, it is one that is only available to homeowners that are 62 or older. This loan requires no monthly payment and is typically repaid when the homeowner dies, relocates permanently, or sells the house. The amount borrowed is usually received as a lump sum, fixed monthly payment, or line of credit.

What It Is

  • Loan against your home’s market value
  • Cash received is complete tax-free
  • Aims at improving the lives of retirees
  • Doesn’t require any monthly mortgage payment

What It Isn’t

  • You’re not selling your house
  • You do not give up rights of ownership
  • It isn’t ideal for everybody

The most common type of reverse mortgage is the home equity conversion mortgage or HECM. The HECM is the type you are most likely to get and it covers just about all the reverse mortgages that lenders would offer on homes whose values are below $765,600.

Unlike regular loans that require a fixed monthly payment, you don’t repay a reverse mortgage until it attains maturity. Learn more details about the reverse mortgage process

Three different reverse mortgages

  1. Federally-insured – also known as Home Equity Conversion Mortgage (HECM), insured by the U. S. Department of Housing and Urban Development (HUD). Three popular variants of the HECM loans are HECM Fixed, HECM Adjustable, and HECM reverse mortgage for purchase.

  2. Proprietary – private loans offered by companies, available only for high appraised value properties since they are backed by profit-oriented companies. They are popularly known as Jumbo Reverse Mortgage.

  3. Single Purpose – the least costly alternative, extended for an exclusive purpose, which you have to specify beforehand.

You’re the Full Owner of Your Home

A reverse mortgage grants you continued ownership of your home.

Typical of any mortgage, you would receive a statement listing out all interest charges as well as balance information on a monthly basis.

In addition, you would still remain faithful to paying your homeowners’ insurance and property taxes.

The stark difference, however, would be that your monthly statement would not be accompanied by a coupon. And this is for the simple reason that you are not required to make any payment.

If you feel up to it, you can put down a full or partial payment for the interest without incurring extra charges or penalties.

You’re In Complete Control

In this scenario, you have various choices to make and it is all dependent on you. For instance, you can decide to begin repaying the interest accrued by the reverse mortgage and you can pay part or completely with no penalty attached.

On the flip side, you can decide to deduct interest as with a good ol’ traditional home loan, with the approval of a tax professional of course, and then you could pay off your loan at any given time with cash from another loan refinance or outrightly put the house up for sale.

Eligibility

First off, as the primary homeowner, you must be 62 or above.

Next, after financial assessment, HUD typically begins the process of underwriting borrower income and credit to ensure that borrowers have the capability and willingness to pay up their insurance and taxes.

They usually require that borrowers have some residual income left over after property charges have been fully taken into consideration.

P.S. Residual income refers to the sum of money that should be left for you to spend each month after property charges and debts have been deducted.

Mandatory HUD Counseling

The Federal Housing Administration mandates all applicants to get counseling from a third-party either in person or over the phone. This is to guarantee that you completely understand everything that reverse mortgage entails.

Upon receiving the counseling, you would then be granted a certification of completion that would then be signed and presented to whichever lender you intend to make use of. 

Flexible Reverse Mortgage Solutions

Get Cash Out. Receive a Monthly Payment, and Open a Line of Credit with a Reverse Mortgage. Calculate Your Eligibility

Essential Queries and Observations

How Much Can I Borrow?

The amount that you get from a reverse mortgage typically varies depending on your payment plan and the lender of course. For a HECM, factors considered include the loan’s interest rate, the youngest borrower’s age as well as the FHA’s maximum claim amount of $765,600 or how much less than this it is.

Of course, you cannot borrow the total worth of your home, or even an amount close to it. In addition, a portion of your home’s equity goes towards covering expenses brought about by the loan including interest and mortgage premiums.

Is a Reverse Mortgage the Right Choice?

A reverse mortgage is good for anyone with needs or wants that current income cannot take care of.

It is a great way to live your retirement years joyfully as well as remain in the home that you love so much. 

When Is It a Bad Idea?

Reverse mortgages are accompanied by certain closing costs, therefore, this loan may be a bad idea for you if you intend to relocate within a short while. A good example would be people who may require special care in an inpatient facility or nursing home.

Repayment Without Penalty?

You are completely free to pay up your loan at any given time without being slapped a penalty.

Except you carry out regular voluntary payments of the mortgage, your loan is only due when the last surviving spouse no longer refers to that property as a primary residence.

Typically, your heirs are given up to 12 months to make a sale and then refinance the transaction in order to pay up the loan balance.

If your heirs don’t take action, the lender would be left with no choice than to foreclose on the home.

Considering Income Taxes

Any funds that come your way stemming from your reverse mortgage are non-taxable due to the fact that they are not regarded as income.

Any Effect on Medicare or Social Security?

Medicare and social security are public benefits and would therefore not be affected by a reverse mortgage. However, if you were receiving assistance on the basis of certain needs, your eligibility can be affected.

This arrangement is not peculiar to a reverse mortgage alone — availability of funds can alter your access to these programs.

How To Qualify?

With the introduction of Financial Assessment into the reverse mortgage program, lenders are able to determine the veracity of claims made.

You would easily qualify for a reverse mortgage if you meet up to the FHA’s residual income requirement and if you haven’t had late payments on consumer credit or property charges dating as far back as 24 months before.

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Summary:

A reverse mortgage is a loan against your home’s equity and doesn’t require any monthly mortgage payments.

To be eligible, you would need to have at least about 50% equity in your home.

Equity that remains would go to your heirs.