Residential Real Estate:
Reverse mortgages allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.
In a regular mortgage, you make monthly payments to the lender. But in a reverse mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your main residence. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations.
To qualify for most reverse mortgages, you must be at least 62 years old and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are typically tax-free, and many reverse mortgages have no income restrictions.
Types of Reverse Mortgages:
Single-Purpose Reverse Mortgage: These generally have very low costs. But they are not available everywhere, and they only can be used for one purpose specified by the government or nonprofit lender, for example, to pay for home repairs, improvements, or property taxes. In most cases, you can qualify for these loans only if your income is low or moderate.
Federally Insured Reverse Mortgage (or HOME EQUITY CONVERSION MORTGAGE - HECM): These tend to be more costly than other home loans. The up-front costs can be high, so they are generally most expensive if you stay in your home for just a short time. They are widely available, have no income or medical requirements, and can be used for any purpose.
Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan’s costs, financial implications, and alternatives. The amount of money you can borrow with a HECM depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.
The HECM gives you choices in how the loan is paid to you. You can select fixed monthly cash advances for a specific period or for as long as you live in your home. Or you can select a line of credit, which allows you to draw on the loan proceeds at any time in amounts that you choose. You also can get a combination of monthly payments plus a line of credit.
HECMs generally provide larger loan advances at a lower total cost compared with proprietary loans. But owners of higher-valued homes may get larger loan advances from a proprietary reverse mortgage. That means, if you have a higher appraised value without a large mortgage, then you may qualify for greater funds. Location (for example, your neighborhood) is only one part of the determination of appraised value.
Proprietary Reverse Mortgage: These are private loans that are backed by the companies that develop them.
If you are considering a reverse mortgage, below are a few things to consider:
Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender generally sets these fees and costs.
The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.
Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions.
Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A “nonrecourse” clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid
Since you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses.
Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
If you want to make a home repair or improvement or need help paying your property taxes, you may want to find out if you qualify for any low-cost single-purpose loans that may be available in your area.
If you live in a higher-valued home, you may be able to borrow more from a proprietary reverse mortgage, although it will cost more. The best way to see the differences between a HECM and a proprietary loan is with a detailed side-by-side comparison of future costs and benefits. Many HECM counselors and lenders can provide you with this important information.
No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.