If you're 62 or older and you own your home with equity, you may qualify for a reverse mortgage. Reverse mortgages are versatile options for seniors that allow you to take the equity from your home as a lump sum, regular payments, or a line of credit. You don't need to make monthly payments on your reverse loan; instead, the loan is due when you sell or leave the home.
The proceeds from the loan can be used in many ways, including supplementing your income in retirement, paying for health care, traveling or paying off the remaining balance on your mortgage. With a reverse mortgage, you can remain in your home and even improve your quality of life. A reverse mortgage doesn’t work perfectly for everyone, though, so it's important to understand how it works and the consequences to decide if it's a good choice for you.
Common Reverse Mortgage Questions
Q: What Is a Reverse Mortgage?
A: A reverse mortgage is essentially a home loan to convert some of the equity developed from your home into cash payments. Unlike a standard mortgage, this loan does not require payments or repayment of any type until the home is no longer your primary residence. This type of loan can also be known as an HECM. This stands for home equity conversion mortgage. This occurs when it's insured by the FHA. Most reverse mortgages are HECMs, but reverse mortgages can also be offered by local and state governments (single-purpose reverse mortgages) or by lenders (proprietary reverse mortgages).
Q: Do I Qualify for a Reverse Mortgage?
A: There are only a few requirements you must meet to be eligible. You must currently own your own home. You must be 62 years old or older. Your home must be paid off or you must currently have a low mortgage balance which would allow for it to be paid fully though the proceeds of the reverse mortgage. You are also required to have the resources to pay for property taxes, homeowner's insurance, and home maintenance. The home in question has to be the primary residence of the applicant. Before taking out the loan, you are required to attend HECM counseling, which may be free or at a low cost.
Q: Can I Leave My Home to My Heirs?
A: This depends on a few factors. When the home is no longer the borrower's primary residence, the loan and interest must be repaid. The home can either be sold to pay back the loan or your heirs can take out a new mortgage to keep the home. The balance of the loan can never exceed the value of the home. If the home is worth more than the loan balance, all remaining equity or proceeds of the sale will go to your heirs. Your heirs will never be responsible for the debt itself.
Q: How Do I Receive Loan Proceeds?
A: There are several ways to receive your loan payments. Some seniors prefer to receive the money as a lump sum at closing. That money can be used for anything or saved for a rainy day. You can also receive the money as monthly payments. With the tenure option, you will get equal payments every month whilst you live in the home. With the term option, your payments will be spread over a specific period of time. A line of credit is another option to access the money as needed. You can even receive the money as a combination of monthly payments and a line of credit.
Q: Will Reverse Mortgage Proceeds Affect Medicare or Social Security?
A: The proceeds of a reverse mortgage will not affect your Medicare or regular Social Security benefits as the money is considered a loan, not income. Still, the proceeds must be used immediately if you receive Supplemental Social Security (SSI) or Medicaid. If you don't, the money will be considered an asset and may affect your eligibility. Medicaid serves low-income individuals who have liquid assets of $2,000 or less at the end of every month. If you spend the loan proceeds immediately, you will be fine. This may be a good idea if you want to apply for a reverse mortgage to pay off a large debt or make home repairs or improvements.
Q: What Are the Downsides with a Reverse Mortgage?
A: If a reverse mortgage sounds too good to be true, keep in mind there are drawbacks. Reverse mortgages tend to have high upfront costs that can be 1.5% higher than traditional mortgages. The interest rate on a HECM is also higher than a conventional loan, which means the loan balance will continue to grow while you remain in the home. Your loan cannot be refinanced, either. The loan may make it harder to qualify for other loans and it can quickly drain the remaining equity in your home.
If you want to leave your home to your heirs, a reverse mortgage may not be the best idea. This loan will be due immediately when you die. Heirs will need to pay the loan in full or 95% of the balance to keep the home.
Q: How Can I Use the Loan Proceeds?
A: Any way you want! There are no restrictions on how you use the loan. You can use it to supplement retirement income, pay off your remaining mortgage balance to get rid of housing costs, make improvements to your home so you can age in place, pay for Medicare Part B and D, or pay down debt.
Hopefully you have a better understanding of how reverse mortgages work. While this type of loan isn't always recommended, it can be a great way to supplement retirement income, pay off debt, and cover daily expenses.