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Reverse Mortgages


The baby boomers have certainly turned this product into a raging success, and with that success, came a storm of questions about what a reverse mortgage is and how it works. There are many misconceptions and preconceived notions about a reverse mortage and what it actually does for senior citizens. Here is an outline of the facts regarding reverse mortgages:

Qualifications

To qualify for most reverse mortgages, you must be at least 62 years oldand either you or someone else on the loan must be living in the home. The proceeds from the loan are typically tax-free (be sure to consult your tax advisor), and many of them do not have income restrictions.

What is a Reverse Mortgage?

With a traditional mortgage loan, you must qualify for a loan amount based on income, debt, and credit. Once you've received the loan, you are required to make monthly payments to the lender. With a reverse mortgage, lenders use the equity in your house to make monthly payments to you. The loan does not have to be paid back for as long as you live in your house, and the debt does not transfer to your estate or heirs. That means the loan will have to be paid upon your death, sale of your house, or if you no longer live there as your principle address.

The point of a reverse mortgage is to help those with a fixed income meet their financial obligations. It helps to supplement social security and retirement income, or simply pay medical expenses or household repairs. However, it does put forth certain financial restrictions.

Three types of Reverse Mortgages

There are three types of reverse mortgages available: single-purpose reverse mortgages which are offered through some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are backed by the U.S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages that are backed by the private companies that develop them.

The single-purpose loans are usually of lower cost than the other two; however, they are not available everywhere and can only be used for one purpose that is specified by the government or nonprofit organization. In most cases, these loans require that you have low to moderate income to qualify for them.

Federally-insured and proprietary reverse mortgages tend to be more expensive upfront than other home loans, so they are not recommended for those that will only be in their home for a short period of time. However, they are widely available and have no income or medical requirements. They can be used for anything the homeowner wishes. Before applying for the federally-insured reverse mortgages, you will be required to meet with a government counselor whose job it is to explain the fees involved and any other alternatives that you may qualify for. Once all other options are eliminated, then the loan process can begin.

How Much Can I Borrow?

The amount that you can borrow depends on several factors: your age, type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the older you are, the more your house is worth, and the less that you owe on it, the more money you can borrow.

Loan Features

Reverse mortgage proceeds are not taxable and generally do not effect Social Security or Medicare benefits. You still retain the title to the property and do not have to make monthly loan payments. The loan becomes due when you or the last surviving borrower dies, sells the house, or no longer lives in the home as the principal residence. With federally-insured reverse mortgages, you can live in a nursing home for 12 months before the loan becomes due and payable.

As you consider whether this product is for you or not, keep the following in mind:

  • Lenders generally charge origination fees and other closing costs, as well as servicing fees due to the nature of the loan. These fees are set by the lender.
  • The amount you owe generally grows over time as you are not making monthly payments, but are accruing interest. The best way to think of this is that you are receiving a loan and will have a balloon payment (or one lump payment) due at the end.
  • Reverse mortgages can have either fixed or variable rates, though most have variable rates that are tied to a financial index and will typically change as the market changes.
  • Because you retain the title to the home, you are responsible for all taxes and insurances. Not paying these can result in the loan immediately becoming due and payable.
  • Reverse mortgages can use all or some of the equity in your home, resulting in less assets for you and your heirs. There is a "nonrecourse" clause within most reverse mortgages that prevents either you or your estate from owing more than the house is worth.
  • Interest on reverse mortgages is not tax deductible until the loan is paid in full or in part.

If you are considering a reverse mortgage, be sure to shop around and compare your options. Know what is available to you and whether or not you can afford to do this. Be cautious of anyone trying to sell you something that you think you don't need. Be even more cautious if you don't fully understand what they are trying to sell you. There is a lot of fraud that is targeted at the senior citizen community and it is important to be aware of it so that you can make informed decisions about your finances.


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