A Reverse Mortgage Pays You Cash And Lets You Keep Your Home
A Reverse Mortgage helps older homeowners who are “house-rich but cash-poor” remain in their homes and still meet their living expenses. Since your home is probably your largest single investment, it's smart to know more about Reverse Mortgages, and decide if one is right for you!
Who can qualify for a Reverse Mortgage?
You must be at least 62 years old and own your own home. Your spouse should also be at least 62 years old, so that they can be a party to the mortgage. If there is already a mortgage on your home, the balance must be paid off with the proceeds of the Reverse Mortgage. You can qualify for a Reverse Mortgage even if you have poor credit or no credit at all. You can qualify even if you have low income or no income at all.
Before borrowing, applicants must seek HUD approved counseling. The free counseling is a safeguard for the borrower and family, to make sure they completely understand what a Reverse Mortgage is, and the details of the application process.
How does a Reverse Mortgage work
The Reverse Mortgage is different from a conventional mortgage in that it pays you, and is available regardless of your current income. But with a Reverse Mortgage, you don't have to make monthly repayments. You are taking your house equity out in cash. So, with a reverse mortgage, your debt increases, and your home equity decreases.
With a Reverse Mortgage, the lender sends you cash, and you make no repayments while you live in the home. The amount you owe (your debt) gets larger as you get more and more cash and more interest is added to your loan balance.
As your debt grows, your equity in the home decreases. “Debt" is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. "Home equity" means the value of your home (what it would sell for) minus any debt against it. For example, if your home is worth $150,000 and you still owe $30,000 on your mortgage, your home equity is $120,000
Can I lose my house?
The lender can never take your house or force you to sell it, as long as you are living in it. You cannot be foreclosed or forced to vacate your house because you missed your mortgage payment, since no payments are required.
How much can I borrow?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are and the lower the interest rate, the more you can borrow. For example, a 66-year-old with a $500,000 home may receive about $163,000 from a Reverse Mortgage.
How do I receive my cash?
You can choose to receive equal monthly payments over your lifetime. Or you can choose to receive equal monthly payments for a fixed number of months. You can also keep some of the money on reserve, as a line of credit which will be available whenever you ask for it.
How do I repay the Reverse Mortgage?
When you sell your home or move from it, you are required to repay the lender. You must repay the cash you received from the Reverse Mortgage, plus interest and other fees. The remaining equity in your home, if any, belongs to you or to your heirs. You never have to repay anything more than the value of your home. If the value of the home is less than you owe on the Reverse Mortgage, the full debt will be satisfied. The lender cannot seize any of your other assets. If you die, the house will be sold to pay the lender, but the debt will not be passed along to your heirs.
How much does a Reverse Mortgage cost?
There are no Reverse Mortgages with fixed interest rates, because the Reverse Mortgage has no fixed time limit. The interest rate is adjustable every year, or semi-annually or even monthly. Currently, Adjustable Rate Mortgages cost 7.8% a year. Interest will accrue on the mortgage until the homeowner moves or dies.
Another big factor with Reverse Mortgages are the high upfront costs. There will be an insurance premium of 2 percent of the loan and a 2 percent loan origination fee. Thus a $200,000 loan would have $8,000 in costs beyond the normal closing costs added onto the loan at the outset. The insurance is paid to the lender after you move out, if your house is then worth less than the outstanding balance of the mortgage. Other closing costs include appraisal fee, title search, and other fees, which amount to some thousands of dollars. In addition, there is a monthly service charge of between $25 and $35 that is usually added to the total amount of the loan. The costs of a Reverse Mortgage typically will be deducted from the cash you receive, and will be subject to interest charges over the life of the mortgage.
Like all homeowners, you are still required to pay your real estate taxes and other conventional payments like utilities. And the terms of the Reverse Mortgage require you to keep the home in good repair.
What are the tax consequences of a Reverse Mortgage?
The IRS does not consider the cash loan to be income. And you cannot deduct the interest charge until it is actually paid, that is, at the end of the loan. If an annuity is involved, cash advances may be partially taxable as income.
Will the Reverse Mortgage affect my Social Security eligibility?
The income from a Reverse Mortgage will not affect your Social Security payments, pensions or Medicare.
If you receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received. The borrower could then lose eligibility for such public programs if their total cash on hand and other liquid assets is then greater than those programs allow.
The drawbacks of a Reverse Mortgage
The Reverse Mortgage is an expensive way of getting some money to live on. Because of high upfront costs, you should plan to stay in the house five or ten years. There is also the risk that the variable interest rate might increase significantly.
When the homeowner moves or dies, a Reverse Mortgage becomes due and payable. You may owe a lot of money and your home equity could be very small. If you have the loan for a long time, or if your home's value decreases, there may be no equity left at the end of the loan.
A spouse who is less than 62 years old cannot be named as a borrower on the mortgage. In this case, the spouse can be forced to sell the house upon your death.
In the United States, a Reverse Mortgage must be the first and only mortgage on the property. Even if your house appreciates, a second Reverse Mortgage cannot be taken out.
What else should I consider?
From the financial point of view, the best decision to meet your cash needs is usually to sell the current house, and downsize into a smaller home or apartment. The cash received in the sale will be double or triple what a Reverse Mortgage will pay. The cash can be invested to help with living costs.
Studies show that over 80% of elderly homeowners do not want to move. But seniors should be encouraged to consider other ways to tap their home equity. For their peace of mind and financial well-being, it helps to explore all housing options before making a decision. And, if your back is up against the wall, it's comforting to know that a Reverse Mortgage is available.
I hope life brings you much success. I wish you a very happy day.
----- Surfer Sam