What is a Reverse Mortgage?

A reverse mortgage is a financial product designed for homeowners, typically aged 62  or  older, that allows them to convert a portion of their home equity into cash without selling their home or making monthly mortgage payments. Unlike a traditional mortgage, where the homeowner makes monthly payments to the lender to pay down the loan balance, in a reverse mortgage, the lender makes payments to the homeowner.

Reverse mortgages can provide financial flexibility and supplement income for retirees.  There are costs associated with this program including origination fees, closing costs, and interest charges. It is important to understand the terms and implications of a reverse mortgage, and feel free to reach out to someone from our team to determine if it's a suitable option for your specific financial situation and goals.

 

Here's how a reverse mortgage works:

1. Eligibility: To be eligible for a reverse mortgage, you must meet certain criteria, including age requirements (typically 62 or older), owning your home outright or having a low mortgage balance that can be paid off with the reverse mortgage, and living in the home as your primary residence.
2. Types of Reverse Mortgages: There are several types of reverse mortgages, but the most common is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). HECMs have government-backed protections and are subject to specific regulations. Private reverse mortgages, offered by private lenders, are another option but may have different terms and requirements.
3. Loan Disbursement: With a reverse mortgage, you can receive the loan proceeds in various ways, including as a lump sum, monthly payments, a line of credit, or a combination of these options. The choice depends on your financial needs and goals.
4. No Monthly Payments: One of the key features of a reverse mortgage is that you do not need to make monthly mortgage payments. The loan balance accumulates over time, with interest and fees added to the principal. The loan is typically repaid when you sell the home, move out, or pass away.
5. Loan Repayment: When the loan becomes due, either because you sell the home or it passes to your heirs, the loan balance, including accrued interest and fees, is repaid to the lender. If the home is sold, the proceeds first go toward repaying the reverse mortgage, and any remaining equity belongs to you or your heirs.
6. Homeownership and Obligations: While you have a reverse mortgage, you must continue to live in the home as your primary residence, maintain the property, and keep up with property taxes and homeowners’ insurance. Failing to meet these obligations could result in foreclosure.
7. No Risk of Owing More Than the Home's Value: For HECMs, borrowers (or their estates) will never owe more than the home is worth when the loan is repaid, even if the loan balance exceeds the home's value.

 

Benefits include:

1. Supplemental Income: A reverse mortgage allows homeowners aged 62 or older to convert a portion of their home equity into cash. This can provide a source of supplemental income to help cover living expenses, medical bills, or other financial needs.
2. No Monthly Mortgage Payments: Unlike a traditional mortgage, where you make monthly payments to the lender, a reverse mortgage typically doesn't require monthly repayments. Instead, the loan is repaid when the homeowner sells the home, moves out, or passes away.
3. Stay in Your Home: You can continue to live in your home as long as you meet the loan requirements, such as maintaining the property and paying property taxes and homeowners insurance.
4. Flexible Payment Options: Reverse mortgages offer several payment options, including a lump sum, monthly payments, a line of credit, or a combination of these. This flexibility allows you to tailor the loan to your specific financial needs.
5. No Risk of Loan Balance Exceeding Home Value: With a federally insured Home Equity Conversion Mortgage (HECM), which is the most common type of reverse mortgage, the borrower (or their estate) will never owe more than the home is worth when the loan is repaid, even if the loan balance exceeds the home's value.
6. Non-Taxable Income: The proceeds from a reverse mortgage are generally not considered taxable income, which means they won't affect your Social Security or Medicare benefits.
7. No Income or Credit Requirements: Reverse mortgages are typically not based on your income or credit score, making them accessible to retirees with limited income or poor credit.
8. Loan Repayment is Deferred: Repayment of the loan is deferred until a specified triggering event occurs, allowing you to maintain control of your finances during your retirement years.

 

It's important to note that reverse mortgages also have some potential downsides and considerations. They can be expensive due to upfront fees and interest rates, and they reduce the equity in your home. Additionally, you must meet the loan obligations, such as paying property taxes and insurance, otherwise you could face foreclosure – just like any other loan program.

 

Please contact a qualified financial advisor from our team to determine if it's the right option for your financial situation and goals!