We Know: All About Reverse Mortgages

What's a reverse mortgage?

Introduced in the late 1980s, reverse mortgages can help homeowners who are "house-rich-but-cash-poor" remain in their homes and still meet their financial obligations. With a "regular" mortgage, you make monthly payments to the lender. But with a reverse mortgage, you receive money from the lender and generally do not have to repay it for as long as you live in your home. In return, the lender holds some - if not most or all - of your home's equity.

The proceeds of the loan are tax-free, there are no minimum income requirements, and for most reverse mortgages, the money can be used for any purpose.

Who's eligible for a reverse mortgage?

To qualify for a reverse mortgage, you must be at least 62 and have paid off all or most of your home mortgage. Income is generally not a factor, and no medical tests or medical histories are required. Financial institutions or government agencies offering reverse mortgages may require similar counseling or homeowner education.

What kinds of reverse mortgages are there?

There are several types of reverse mortgages:

  • the federally insured Home Equity Conversion Mortgage (HECM), administered by the Department of Housing and Urban Development (HUD)
  • single-purpose reverse mortgages, usually offered by state or local government agencies for a specific reason
  • proprietary reverse mortgages, offered by banks, mortgage companies, and other private lenders and backed by the companies that develop them

How much can I borrow?

The amount you can borrow depends on your age, the equity in your home, the value of your home, and the interest rate. If it's an HECM, federal law limits the maximum amount that can be paid out.

You can be paid in a lump sum, in monthly advances, through a line of credit, or a combination of all three.

What are the advantages and disadvantages of a reverse loan?

Reverse mortgages offer special appeal to older adults because the loan advances, which are not taxable, generally do not affect Social Security or Medicare benefits. Depending on the plan, reverse mortgages generally allow homeowners to retain title to their homes until they permanently move, sell their home, die, or reach the end of a pre-selected loan term.

However, be aware that:

  • Reverse mortgages tend to be more costly than traditional loans because they are rising-debt loans. The interest is added to the principal loan balance each month. So, the total amount of interest owed increases significantly with time as the interest compounds.
  • Reverse mortgages use up all or some of the equity in a home. That leaves fewer assets for the homeowner and his or her heirs.
  • Lenders generally charge origination fees and closing costs; some charge servicing fees. How much is up to the lender.
  • Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
  • Because homeowners retain title to their home, they remain responsible for taxes, insurance, fuel, maintenance, and other housing expenses.

Thanks to the Federal Trade Commission for the information in this article.

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