While most people understand that a mortgage is a loan to finance a real estate purchase, few people understand the machination of a reverse mortgage. Does the lender actually pay you, the borrower? Are you really permitted to spend the money any way you please? Is it that simple? The answer is yes … and no.
What is a Reverse Mortgage?
According to the U.S. Department of Housing and Urban Development, a reverse mortgage is “a special type of home loan that lets you convert a portion of the equity in your home into cash.” Specifically, it is the equity you built up after years of making mortgage payments. With a reverse mortgage, this money can be loaned back to you.
Unlike a traditional home equity loan, you do not have to repay the loan until or unless you fail to maintain certain criteria. So as long as the home remains your principal residence and you stay current with taxes and insurance payments, you are not required to make any monthly payments towards the loan balance. On the other hand, should you fail to meet the requirements, there can be severe consequences including the lender taking your home.
Why Would I Want a Reverse Mortgage?
There are many reasons to consider a reverse mortgage, such as to cover basic living expenses, health care costs or home improvements. In fact, there are no restrictions on how reverse mortgage proceeds may be used. The proceeds may be collected monthly or in one lump sum, they are tax-free, and heirs are not personally liable if the payoff balance exceeds home value. While that may sound too good to be true, there are also many reasons to not consider a reverse mortgage.
For example, the value of estate insurance may decrease over time as proceeds are spent and fees may be higher for reverse mortgage than traditional mortgage fees. Moreover, although Social Security and Medicare eligibility are not affected by a reverse mortgage loan, need-based government programs such as Medicaid can be. Reverse mortgage is a double-edged sword, so handling it with caution is necessary.
Do I Qualify?
Reverse mortgage loans were conceived as a means to help people in or near retirement and with limited income. To qualify, the Federal Housing Administration (FHA) requires you be at least 62 years of age, own your home (or have mortgage balance low enough that it can be paid off at closing with proceeds from the reverse loan), have the financial resources to pay ongoing property charges including taxes and insurance, and you must reside in the home.
To ensure that you are informed of the potential risks and rewards, you are also required to receive consumer information free or at very low cost from a Home Equity Conversion Mortgage (HECM) counselor prior to obtaining the loan. Online articles, including Frequently Asked Questions from the U.S. Department of Housing and Urban Development, can be useful.
– By Samantha B. Rivers, Editor