For older individuals that have built up substantial home equity, a reverse mortgage can provide a steady stream of cash that can be used for almost any purpose.
What is a Reverse Mortgage?
A reverse mortgage enables a homeowner to use the equity in their home as a source of income. In most cases, money borrowed under a reverse mortgage does not have to be repaid until the borrower dies or sells the home. Money received from a reverse mortgage is not taxable, and can be used for any purpose. Unlike a traditional loan, there are no income, credit or medical requirements needed to qualify. Two common reverse mortgage products are the Home Equity Conversion Mortgage and the HomeKeeper Mortgage.
Who is Eligible for a Reverse Mortgage?
In order to get a reverse mortgage, you must be at least 62 years old, and own and occupy your home. Any other mortgages or liens on your property must be paid off prior to obtaining the loan. During the term of the loan, you must pay property taxes and hazard insurance premiums, and you must maintain the property.
What’s the Difference Between a Reverse Mortgage and a Home Equity Loan?
While both types of loans allow you to use the equity you have built up through years of mortgage payments and rising home values, with a home equity loan, you are required to make payments on the loan as soon as you take out the loan. This payment requirement means you might have to meet income and credit requirements to get the loan.
With a reverse mortgage, you do not have to repay the loan until you leave your home, either through your death, or because you move to another residence. While most reverse mortgages are repaid through the sale of your home, you can use other assets to pay the mortgage, if desired. In addition, if your home’s value at the time the loan is repaid is less than the total loan amount, you are not liable for the difference. This means you will not have to give up other assets in order to pay off the reverse mortgage.
How Much Money Can I Get from a Reverse Mortgage, and How is it Paid to Me?
The total amount of money you can borrow from a reverse mortgage is dependent on three factors:
- The age of the youngest borrower
- The value of the home
- The interest rate used in the mortgage
When you apply for a reverse mortgage, all three factors will be taken into consideration when setting the loan amount.
Money from a reverse mortgage can be taken in one of several ways:
- Through regular monthly payments for the rest of your life, or until you sell or move out of your home.
- Through regular monthly payments for a fixed term.
- Through a lump-sum payment when the loan is taken out
As a line of credit, where you withdraw the money as you need it.
In each of the above cases, you do not pay interest on the money until you actually borrow it.
How do I know if a Reverse Mortgage is Right for Me?
Everyone’s financial situation is different. While reverse mortgages are an excellent choice for many older Americans, they are particularly appropriate when:
- You want to make sure you have a regular source of income to supplement Social Security or a pension.
- You have unexpected medical or other expenses that need to be paid now, but you don’t have the cash flow to support a traditional loan.
- You plan on moving to a retirement home or assisted living center in the future, and you need some cash now.
You may want to talk to your accountant or financial advisor to see if a reverse mortgage is right for you. You are also invited to contact us to learn more about the options for reverse mortgages. We will be able to explain more about some of the options not covered in this overview, and provide some idea of the total amount you could borrow.
Where can I learn more?
You can get more information on reverse mortgages from the following Internet resources. In addition, our office has several printed guides that we would be happy to send you. Just give us a call at 800-859-5648.
- Money from Home – A Guide to Understanding Reverse Mortgages – Published by Fannie Mae, this document provides a detailed look at the Home Equity Conversion and Home Keeper mortgage plans, along with worksheets you can use for financial planning.
- AARP Reverse Mortgage Information – Provides detailed information on the options for obtaining a reverse mortgage.
- The National Center for Home Equity Conversion provides detailed information on reverse mortgages, along with links to other sites.