What is a Reverse Mortgage?
A reverse mortgage is a special type of home equity loan that allows you to receive cash against the value of your home without selling it. You can choose to receive a lump-sum payment, a monthly payment, or a line of credit. You must use the funds you receive to pay off any existing mortgages or other debt against your home and to make required home repairs. There are no restrictions on how you use the remainder of the money.
As long as you spend the payments you receive in the month that you receive them, the money is not taxable and does not count towards income or affect Social Security or Medicare benefits. It also does not count as income for Medicaid eligibility.
When you take out a reverse mortgage, you continue to live in the home and you retain title and ownership of it. You are also still responsible for taxes, hazard insurance, and home repairs. However, you do not have to repay the loan as long as you continue to live in the home. Instead, the amount you owe, based on loan payouts and interest on the loan, becomes due when you or the last borrower, usually the last remaining spouse, dies, sells, or permanently moves out of the home.
Reverse mortgages are available to homeowners age 62 and older. Unlike traditional mortgages, you do not have to provide an income or credit history to get the loan.
Types of Reverse Mortgages
There are three types of reverse mortgages. These include:
- Home Equity Conversion Mortgage (HECM)
The Department of Housing and Urban Development (HUD) offers HECMs and the Federal Housing Administration (FHA) insures them. HECMs are the most popular reverse mortgages, representing about 90 percent of the market. The federal government regulates most upfront costs for HECM loans. There are limits on the total fees and interest rates that you must pay. - Fannie Mae Home Keeper Loan
The loan limits for Fannie Mae Home Keeper Loan is higher than for HECMs. Therefore, you may receive more cash from these loans than with a HECM. - Financial Freedom Cash Account Loans
Financial Freedom Cash Account Loans are designed for seniors who own expensive homes.
Most people get reverse mortgages through a mortgage lender. Some credit unions and banks, with state and local housing agencies, may offer these loans as well
Here is a comparison of conventional and reverse mortgages provided by Department of Health and Human Services.
Reverse vs. Conventional Mortgage
Conventional mortgage |
Reverse mortgage |
|
|---|---|---|
| Purpose | Purchase a home | Get cash from home equity |
| At the time of closing: | You owe a lot and have little equity in the home | You owe little and have a lot of equity in the home |
| During the loan: |
|
|
| At the end of the loan: |
|
|
| Closing costs |
|
|
| In short… |
|
|
Things to think about:
- You continue to own the house and no entity can force you to leave as long as you maintain the home, and make property tax and hazard insurance payments.
- You must meet with a government-approved reverse mortgage counselor before your loan application is complete.
- You or your heirs will never owe more than the value of the home at the time you or your heirs sell the home or repay the loan.
- In order to avoid paying taxes on your reverse mortgage payments, you must spend the entire payment in the month you received it.
Photo: http://www.flickr.com/photos/patrick_q/213724154/sizes/m/in/photostream/
Related posts:
- Reverse Mortgages: Less Complex and Less Costly
- Will You Need Long Term Care?
- Class Act—A New Program for Long Term Care
- Is Long-Term Care Insurance An Option?
Randy Ryder is a Professor Emeritus at The University of Wisconsin-Milwaukee and is a publisher of Elder Parent Help.