What is a reverse mortgage?
A reverse mortgage – also called a Home Equity Conversion Mortgage (HECM) – is a loan that allows you to turn a portion of your existing home equity into tax-free retirement funds while maintaining the title to your home.
How do I qualify for a reverse mortgage?
To qualify, you must be 62 or older, own your home and have built up equity. Your home must be a single-family residence in a one- to four-unit dwelling, or an FHA-approved condominium. Having an existing mortgage does not disqualify you. Your home must be your principal residence and meet U.S. Department of Housing and Urban Development (HUD) minimum property standards.
How is a reverse mortgage different from a home equity loan?
Both a reverse mortgage and a home equity loan use the equity you have in your home to generate cash. However, with a home equity loan, you need to make monthly payments on the principal and interest. With a reverse mortgage, you don’t need to make monthly mortgage payments for as long as you stay in the home. Assuming you continue to pay taxes and insurance, and otherwise comply with the loan terms, the loan does not need to be repaid until after you permanently leave the home.
How much of my home’s equity can I access with a reverse mortgage loan?
Loan amounts vary based on a variety of factors; it largely depends on your particular reverse mortgage loan product; the age of the youngest borrower; current interest rates; and the lesser of the appraised value of your home, the sale price or FHA maximum lending limit.
Will I have to pay any taxes on my loan?
No; the money you receive is not considered income, and therefore it is tax-free.
Will my heirs lose the home?
The loan typically becomes due when the last borrower(s) permanently leave the home. Provided the home is sold to repay the loan, the borrower will never owe more than the appraised value of the home. If you want to retain the home, you or your heirs can pay off the loan balance at any time.
Will I incur any penalties if I decide to pay back the loan early?
No. You can choose to pay back the loan at any time without worrying about being penalized.
How will I receive my funds?
The most common method is a line of credit that you can draw from at your discretion. However, you may also choose to receive a single lump sum, monthly installments, or any combination of these options.
When will the principal and interest charges become due?
The loan must be repaid in full under the following conditions:
- All borrowers permanently move out of the home
- Property tax or insurance payments lapse
- The property is allowed to deteriorate beyond reasonable wear and tear
The loan may come due if the last surviving borrower passes away, sells the home, or fails to live in the home for 12 consecutive months.
What has to be repaid when the loan becomes due?
The loan balance, including any fees that have been added to the principal and the accrued interest on the total principal balance, needs to be repaid. This is usually done through the sale of the house or other assets. However, repaying the reverse mortgage with a conventional mortgage or cash is also an option.
How can I use the proceeds?
Your reverse-mortgage funds can be used for paying off bills, renovating your home, paying for prescriptions and health care, traveling, helping out children or grandchildren, and any other way you see fit. It’s your money; there are no limitations on how you use it.
What if I still owe money on a first or second mortgage?
You may still be eligible for a reverse mortgage, depending on the amount of your remaining mortgage versus the value of your home. The funds from the reverse mortgage must first be used to pay off whatever existing mortgages you have on the property.
How will a reverse mortgage affect my government benefits?
The funds from a reverse mortgage generally do not affect regular Social Security or Medicare benefits. However, needs-based benefits, such as Medicaid, Supplemental Security Income (SSI), Aid for Dependent Children (AFDC), and food stamps may be impacted. A reverse mortgage consultant can provide additional information, but you should contact a tax professional or your local government aid office about your particular situation.
Are interest rates fixed or variable?
Most reverse mortgages have variable rates that are tied to a financial index and will vary according to market conditions. However, fixed-rate reverse mortgages are also available.
What costs are involved with getting a reverse mortgage loan?
As with any loan, there are closing and other costs. However, most fees can be financed as part of the loan. The only out-of-pocket costs are the HUD counseling fee and any necessary appraisal fees.