Reverse Mortgages: How it Works
What is a reverse mortgage and why would I want it?
A reverse mortgage is a type of home loan which can be used for any purpose. Unlike a standard home loan where you make monthly payments, with a reverse mortgage, the lender makes payments to you.
A reverse mortgage provides a way to use the equity accumulated in your house without losing ownership of your house or increasing your monthly payments.
When Can I get a Reverse Mortgage?
To obtain a Reverse Mortgage, you must be at least 62 years of age and the house must be your primary home, where you live at least six months out of the year.
The amount of the Reverse Mortgage is affected by many factors, however generally the value of the Reverse Mortgage increase with your age and the value of your house.
How does a Reverse Mortgage Work?
There are two types of reverse mortgages available, Home Equity Conversion Mortgages (HECM) and proprietary reverse mortgage.
HECM are federally-insured, widely available and have no income requirements. Proprietary reverse mortgages are not federally-insured as they are borrowed through private lenders, however they allow for higher loan amounts. The choice of reverse mortgage that is best for you will depend on your circumstances and needs.
You as the homeowner get to choose how the reverse mortgage is received. The payments may be received monthly, lump sum, or as a credit line. Interest is only charged on the amount received and the interest is added to the loan balance. This means that you do not have to pay the interest up front. Additionally, as the payment from the reverse mortgage is a loan, it is not considered income and is not taxable.
Once you have received the payments, there are no restrictions on how the money may be used. The money can be used to supplement your income, pay debts, or even to buy a new home.
A reverse mortgage will continue until all borrowers permanently move out of the house, sell the house, or the last surviving borrower passes away. Once the reverse mortgage ends, the loan becomes due, which can be paid by the sale or refinance of the house.
Is There Any Cause for Concern with a Reverse Mortgage?
A reverse mortgage can provide invaluable assistance in retirement and is the one of the few ways to access the equity you have built up in your home without increasing your monthly payments. However, there are several things to be aware of and consider before you make the decision to get a reverse mortgage.
The first thing to be aware of is that reverse mortgages often have higher fees than standard mortgages. These fees are rolled into the reverse mortgage and will further reduce the amount of equity you have accumulated in your house.
Second, the loan amount becomes due when the house is sold. As the sale of a house may happen unexpectedly it is important to consider the likely hood of this happening and the impact the reverse mortgage will have on the sale.
A final consideration is the effect the reverse mortgage will have on your estate. As you continue to receive payments, the equity in your house is reduced which will affect the amount received by your heirs.
Is a Reverse Mortgage right for me?
A reverse mortgage is a financial tool available to those who understand how the loan works. When considering a reverse mortgage, it is important to understand as much as you can about the reverse mortgage process, and balance that with your needs.
If you are thinking about a reverse mortgage loan, please contact one of the experienced attorneys at Lonich Patton Ehrlich Policastri. We offer free half-hour consultations.
Please remember that each individual situation is unique, and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.