Are you 62 or older and living on a fixed income or need a lump sum of money for a large expense? Do you need a line of credit without accumulating more debt? A reverse mortgage may be the answer for you. Homeowners that are 62 years of age or older and have considerable home equity can apply for a reverse mortgage, which lends money from the home’s equity until the time of the borrower’s death or move from the home. At settlement, the home will be sold to recoup the balance that was given through the home equity. Most lenders will require at least 50% equity before considering approving a reverse mortgage. The proceeds from the reverse mortgage are not taxable, as the IRS considers this money to be a loan advance.
Reverse mortgages can provide cash in hand to seniors who are financially struggling with their fixed income, or their net worth is tied up in their home’s equity. One thing to be immediately aware of is that these loans can be costly and are often subject to scams. When it comes to a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner can choose to get these payments in a large variety of ways, and the interest of the loan is calculated into the loan amount, so the borrower doesn’t have to pay any costs for the duration of the reverse mortgage. Over the loan’s lifespan, the borrower’s debt will increase, and the home equity will decrease. The home is the collateral for the reverse mortgage, as is the case with forward mortgages (regular home loans). In this case, however, the home is sold upon the owner’s death or move, and the proceeds will to go the lender to pay for the reverse mortgage principal and associated fees accrued over the term of the loan. Any sale proceeds more than what is owed to the lender will go to the owner if still living, or the estate if not. In some cases, the estate may be allowed to pay off the loan balance to keep the home.
There are some broad requirements for reverse mortgages to be approved. The biggest one is the borrower must be 62 years of age or older. The second being that they must own a home, condo, or townhome built after 1976. The home must have at least 50% equity. The borrower will be liable for an origination fee, mortgage insurance, loan servicing fees and interest. There are no income or credit score requirements, but the above points are mandatory across the board. The U.S Department of Housing and Urban Development (HUD) also requires all applicants to complete a HUD-approved counseling session detailing the pros and cons of reverse mortgages with the borrower’s unique situation taken into account. The borrower must keep current on property taxes, homeowner’s insurance, and keep the home in good condition. If the borrower stops living in the home for any reason longer than a year, the loan will come due and need to be repaid. This is usually accomplished by selling the house.
Let’s dive more into the different types of reverse mortgages. The most common type is a HECM, or a home equity conversion mortgage. HECMs make up almost every single reverse mortgage below about $750,000 in home value. If the home is worth more, however, borrowers may be eligible for a jumbo reverse mortgage, which will not going to have limits on the home’s value. Jumbo reverse mortgages are also referred to as proprietary reverse mortgages. There are also different disbursement methods or ways for borrowers to receive the money from their home equity. One is a lump sum, which is essentially just how it sounds. The reverse mortgage is disbursed in full, with a fixed interest rate. This will be the one and only time the money will be given, as it is the whole sum of the mortgage. This is also the only type of disbursement with a fixed interest rate. An alternative to this is in equal monthly payments as an annuity. If at least one borrower lives in the home as their primary residence, the lender will be obligated to make equal monthly payments to the borrower. This can also be referred to as a tenure plan. Additionally, term payments can be made, which is going to be equal monthly payments for a set period of the borrower’s choice. Also, borrowers can receive the money as a line of credit. This will allow them to take out money as needed, and interest is only paid on the amount taken out from the loan. There are a couple ways to combine these payments, as well. One is equal monthly payments plus a line of credit, which disburses a set monthly amount with no end date for the borrower, and makes a line of credit available to them as well. The other method is term payments plus a line of credit, which is like above but does have a certain end date on those monthly payments. The line of credit will be available for the life of the loan on either combined loan program. In some cases, it can also be possible to use a reverse mortgage to buy a different home than the one the borrower is living in, and this is called a HECM for Purchase or a Federal Housing Administration Reverse Mortgage.
There are both pros and cons that occur with reverse mortgages. A reverse mortgage can help seniors who have no liquid assets to regain some cash in their pocket, especially in cases where their home is the only thing they can borrow against. This can help to fund basic living expenses for seniors who are in a tough spot due to fixed income and inflation, or any other number of things. This way, the senior can continue to live in their home AND afford their basic needs without concern of bankruptcy. However, taking out a reverse mortgage means spending a large chunk of your accumulated home equity on fees and costs, including interest. The borrower will probably not be able to pass down the home in their estate, especially if the heirs cannot afford to buy out the reverse mortgage to regain the property after death or move. The other big issue that presents is the length of time the HECM could disburse. If the borrower selects any options with a line of credit, there is a risk that they could prematurely spend all the money and not have anything else to borrow from if they need it cash. The borrower could also outlive the term that they set up payments for, again putting them in a tough spot financially with no other assets to borrow from.
Reverse mortgages are a unique way to provide homeowning seniors some extra income, either through monthly payments, a lump sum, or a line of credit. Get in touch with us today if this is something that could help you, your family member, or someone you know. We understand it can be very tough to balance inflation with a fixed income and we are always here to help.