A reverse mortgage is just what it sounds like – it is a lien on a home that works in reverse to a traditional mortgage. Instead of borrowing money to purchase a home, a homeowner starts off owning the home and takes out a reverse mortgage in order to release the equity from their property in the form of payments or as a lump sum payment. Due to the way a reverse mortgage works, they are only available to seniors.
The obligation of the homeowner to pay back their mortgage is deferred until the owner dies, sells the home, or moves to a nursing home or assisted living facility. Reverse mortgage lending limits are $625,500, regardless of how much the home is worth and the maximum amount that can be charged for a loan origination fee is $6,000.
Pros and Cons of Reverse Mortgages
Who Qualifies for Reverse Mortgage?
In the United States, only borrowers who are 62 years or older qualify for reverse mortgages. Unlike other mortgage products, it doesn’t matter which credit score range you are in and there are no credit or minimum income requirements. If you have an existing mortgage when you apply for a reverse mortgage, you must pay it off with proceeds from a reverse mortgage. Not all homes will qualify for a reverse mortgage. Mobile homes qualify if they meet certain criteria, like having a permanent foundation and being built after 1976.
Anyone looking to get a reverse mortgage must first attend third party financial counseling by a provider who is approved by the Department of Housing and Urban Development (HUD). During the counseling, borrowers will learn exactly what a reverse mortgage is and how to obtain one before proceeding with the process. The counseling sessions cost around $125, although there are federal agencies which provide grants to enable people to attend counseling for free.
Advantages of Reverse Mortgages
Many people automatically assume a reverse mortgage seems “too good to be true,” but in the right circumstances a reverse mortgage creates a valuable financial resource for individuals during their retirement. Benefits and advantages of a reverse mortgage include:
- No default. Where as you can lose your home if you fail to make payments on a home equity loan, reverse home mortgage lenders do not have claim over your assets or income.
- Cannot be “upside down.” You will never owe more than the value of your home, even if the price of the home declines after you secure a reverse mortgage.
- Use the money how you want. There are no restrictions for what you use money from a reverse mortgage for. You can use it to travel, purchase long term care insurance, pay for your children or grandchildren educational expenses, get a new car – anything goes.
- Tax free money. when a homeowner receives money from a reverse mortgage, it’s actually a loan. So the money is not taxable.
- Choose how you get the money. You can receive money from a reverse mortgage in a single lump sum, a credit line, annuity, or a combination of payment options.
- Remain homeowner. You remain the homeowner and have the ability to stay in your home with a reverse mortgage – for as long as you want.
Disadvantages of Reverse Mortgages
Like everything in life, there are also disadvantages involved with reverse mortgages. The following circumstances may render a reverse mortgage a poor choice for you:
- Eligible for Low-income assistance. If you receive low-income assistance from the government (such as Medicaid) keep in mind that getting a reverse mortgage may disqualify you from receiving the benefits.
- Planning to move soon. You owe the reverse home mortgage loan back to the lender if you decide to move from your primary residence. If you plan to move in a short period of time after obtaining a reverse mortgage, it’s not in your best interest to get one. Closing costs on reverse mortgages are higher than conventional mortgages, and this will be a costly move.
- Leaving house to heirs. If you intend to leave your home to your heirs, a reverse mortgage may not be a good option. It decreases equity in your home and affects the value of the estate. If you do a reverse mortgage, you can still leave the home to heirs who can choose to refinance, pay off the mortgage, or sell the home.
Reverse Mortgages Can Be Useful
Reverse mortgages can be useful when used in the right situation – but they aren’t for everyone. If you qualify for a reverse mortgage and find yourself needing income, then a reverse mortgage may be a good way to tap into your home equity. Just keep in mind the situations in which a reverse mortgage is due: when the owner dies, sells the home, or moves to a nursing home or assisted living facility.