Quick Take:
- Used to convert equity in a home into an income stream
- Must be 62 years of age or older
- Ownership of the home remains with the borrower/homeowner
- Money can be used for anything
- Need not be repaid until the borrower no longer lives in the home
- Lender will recover its principal and interest when the home is sold. If the home sells for more than is owed, the excess goes to the homeowner or his or her heirs. If sale proceeds are insufficient to repay the amount owed, HUD will pay to the lender the amount of the shortfall.
- Money provided to you from a reverse mortgage is tax-free.
- Offered by banks, thrifts and other financial institutions.
A reverse mortgage is a special type of loan used by older Americans to convert the equity in their homes into cash. The reverse mortgage is aptly named because the payment stream is reversed. Instead of the borrower making monthly payments to a lender as with a regular first mortgage or home equity loan, a lender makes payments to the borrower. Just as with a regular mortgage, ownership of the home remains with the borrower.
The money from a reverse mortgage can be used for ANYTHING from daily living expenses, home repairs and home improvements, medical bills and prescription drugs, to pay-off existing debts, education, travel, long-term health care, prevention of foreclosure, and other needs. In fact, proceeds from a reverse mortgage may be used to pay off an existing mortgage. If your home needs improvements to qualify for a reverse mortgage, a portion of the proceeds may be set aside for this purpose.
A reverse mortgage need not be repaid until the borrower no longer lives in the home. The lender will recover its principal and interest when the home is sold. The remaining value of the home will go to the homeowner or to his survivors. If the sales proceeds of the home are insufficient to repay the amount owed to the lender, HUD will pay to the lender the amount of the shortfall.
Proceeds from a reverse mortgage may be received in several ways: all at once (lump sum), fixed monthly payments (for up to life), a line of credit, or a combination of a line of credit and monthly payments. The most popular option, chosen by more than 60 percent of borrowers, is the line of credit, which allows you to draw on the loan proceeds at any time.
To qualify for a reverse mortgage the homeowner must be at least 62 years of age. There are no income or medical requirements and the house does not need to be debt-free to qualify for a reverse mortgage.
The size of the reverse mortgage that you can get will depend on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates, and, sometimes, where you live. In general, the older you are and the more valuable your home (and the less you owe on your home), the larger the reverse mortgage can be.
The costs associated with getting a reverse mortgage include the origination fee (which usually can be financed as part of the mortgage), an appraisal fee and other charges similar to those for regular mortgages. The money provided to you from a reverse mortgage is tax-free. But the funds received from a reverse mortgage may affect the borrower’s eligibility for certain kinds of government assistance, so you should check into this before getting a reverse mortgage.
Be assured that the lender cannot take away your home if you outlive the loan. In other words, the loan does not become due until your home is sold, is no longer your primary residence or you die. You cannot be forced to sell your home to pay off the mortgage loan even if the loan balance grows to exceed the value of your property.
To apply, you must first meet with a reverse mortgage counselor. You can obtain a list of the reverse mortgage counseling agencies by calling HUD at 1-888-466-3487 or accessing HUD’s Web site at www.hud.gov.
Reverse mortgages are offered by banks, thrifts and other financial institutions. Currently, four reverse mortgage products are available to U.S. consumers and one product is available in Canada. In the U.S., the most popular reverse mortgage is the federally insured reverse mortgage, called the FHA Home Equity Conversion Mortgage Program (HECM). The other major product is the Home Keeper reverse mortgage, which was developed in the mid-90s by Fannie Mae, a private national mortgage company.
If you or a loved one has modest income but a large amount of equity in a home, consider the reverse mortgage as a low-risk way to obtain income while retaining control of your homestead. See your financial advisor or a reverse mortgage counselor for more details. Proceeds from a reverse mortgage can even be used as capital for a business.
Be aware that scam artists charge thousands of dollars for information about reverse mortgages. This information is FREE from Housing and Urban Development (HUD). And HUD does not recommend using an estate planning service or any service that charges a fee for referring a borrower to a lender.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
D.L. Perkins, LLC is solely responsible for this content.
