For people who are in their 60s, a reverse mortgage is an option for acquiring more money to pay bills or other expenses. Since a reverse mortgage uses the equity in the home, it also reduces a person’s assets. This means less asset value for heirs if they would otherwise inherit the home.
How Reverse Mortgages Work With a traditional mortgage, a person pays a lender every month and eventually owns the home. A reverse mortgage is a loan where the lender pays the homeowner. The value of the loan is tied up in the home’s equity, which is converted into payments for the homeowner. Think of it as an advance on the equity. Payments are typically not taxed, and the money does not have to be paid back as long as the homeowner remains in the home. However, the balance is due when the homeowner moves out, dies or sells the home. When that happens, the homeowner or the estate must repay the loan. For this reason, a reverse mortgage can be a burden on surviving family members if it is not planned correctly. If there is a life insurance policy, a policyholder should update the amount to include enough for survivors to pay off the balance.
Reverse mortgages may be single-purpose, proprietary or insured by the government. When they are insured by the government, they are considered home equity conversion mortgages. For all types of reverse mortgages, the homeowner keeps the title to the home. An advance is received every month instead of making a mortgage payment. In some cases, a spouse who is not on the loan may still remain in the house if the borrower dies. This is usually true of a HECM. However, the spouse will not receive any monthly payments after the borrower dies.
These are some important considerations for reverse mortgages:
There are additional fees. Plan on an origination fee, closing costs and servicing fees. Mortgage insurance may also be required for HECMs.
The amount owed grows. Since interest is added to each equity payment, the amount due grows over time.
Interest is not deductible each year. Interest cannot be deducted on a tax return until the loan is being paid off.
Interest rates may change. Reverse mortgage loans have variable rates, which fluctuate considerably. HECMs may have fixed rates with a lump-sum payment at closing.
Homeowners still cover their own costs. Since the homeowner retains the title, he or she is still responsible for utilities, maintenance, insurance and other costs. Also, the lender can stop loan payments if the homeowner does not pay for insurance or property taxes.
Types Of Reverse Mortgages
When considering a reverse mortgage, it is important to understand the three options. Each one has its own benefits.
Single-purpose mortgages are less expensive. Local and state government agencies usually offer these loans, and some non-profit organizations may offer them. The lender specifies one purpose for the loan. For example, the lender may say that the loan funds are only for conducting major home improvements if the home is a historic one. To qualify, homeowners usually only need low or moderate income.
Proprietary mortgages are backed by their originators. If a lender develops this type of loan, that financial institution or party will back it. This is a good option for people who own high-value homes and want a larger advance. Those who have a small mortgage balance and a high appraisal value will receive the biggest advance.
Home equity conversion mortgages are for any purpose. Homeowners can use these loans for anything from paying off personal bills to making improvements on the home. HECMs are backed by the U.S. Department of Housing and Urban Development. These loans tend to be more expensive and come with higher upfront costs. There are specific criteria for qualification, and potential borrowers must meet with appointed personnel before applying.
With careful planning, a reverse mortgage can be a benefit for a senior citizen who needs money and does not have a better source for it. To learn more about this option and planning for it with insurance, discuss concerns with an agent.