A reverse mortgage is a loan against the equity in your home. Lenders usually offer these loans to homeowners over the age of 62.
The money you receive is tax-free, and it won’t impact your Social Security benefits or Medicare coverage. It can be received in a lump sum, monthly payments or as a line of credit.
How do I get a reverse mortgage?
A reverse mortgage lets you borrow money based on the equity in your home, without needing to make payments. But it’s important to consider your options and plan carefully. For example, a HECM mortgage has strict rules about how the proceeds can be used, but proprietary (private) loans may have different requirements.
It’s also important to understand what happens if your spouse isn’t on the loan, or if you die or move into a nursing home. Your heirs will be responsible for paying back the loan, even though they don’t own it.
Be wary of a lender that pressures you to get a reverse mortgage or suggest ways to invest the money. It’s illegal for lenders to require you to buy financial products or services, including long-term care insurance and annuities, in order to qualify for a reverse mortgage. It’s also important to consult with a HUD-approved housing counselor before you apply. Your lender should have a list of approved counselors.
How does a reverse mortgage work?
Reverse mortgages are a type of home equity loan that allows homeowners to use the equity they have built up in their homes. These loans are typically backed by the federal government through the Home Equity Conversion Mortgage (HECM) program or offered by private lenders under their own proprietary programs.
Reverse mortgage borrowers must meet certain requirements. These include: age (at least 62 years old), home equity, and residence. Borrowers must also undergo counseling with a HUD-approved reverse mortgage counselor. Additionally, borrowers must continue to pay property taxes, homeowners insurance, and maintain the home as their primary residence.
In some cases, a borrower may want to get out of a reverse mortgage. This could be due to a change in their financial situation, higher interest rates, or a desire to move into another home. It is important for borrowers to consider the reasons behind wanting to get out of a reverse mortgage before they do so.
How do I pay off a reverse mortgage?
The loan only needs to be paid back when the borrower, co-borrower or eligible spouse passes away, sells the home, or moves out for 12 months or more. Heirs may also be responsible for the reverse mortgage if they remain in the home after the borrower passes away.
The HECM loan is the only federally backed reverse mortgage that does not require a payment until after the “maturation event.” However, homeowners are free to choose any payout method and may opt to pay toward their loan balance prior to this date.
Reverse mortgages are complex and should never be rushed into. If you change your mind within three days of closing, you can exercise the right of rescission and cancel the loan with no penalty. If you’re already in the process of obtaining a reverse mortgage, you can also refinance into another type that offers better terms. This can help reduce your interest rate, change an adjustable to a fixed term or access more equity.
How do I stay in my home?
Reverse mortgages are different than traditional home loans because repayment does not take place over time through a monthly mortgage payment. Instead, the loan becomes repaid when at least one borrower or eligible non-borrowing spouse continues to live in the home and pays property taxes, insurance, homeowner association dues, and other maintenance charges.
If a borrower decides to sell the home, they can pay off the loan with the proceeds from the sale. Borrowers can also choose to continue receiving monthly payments for a specified amount of time, known as tenure payments.
Many seniors are unsure how to proceed after their reverse mortgage is paid off. They may feel they need to move, have a new financial situation, or have an issue with their lender. Unfortunately, scammers have capitalized on this fear, and a few common mistakes can lead to expensive consequences for homeowners. That’s why it is important for borrowers to be well informed about the benefits, drawbacks, and other options that exist when considering a reverse mortgage.