When Mildred Austin inquired about a reverse mortgage, she did not know much about them. “All I knew was that this could help me; I needed someone to explain it to me”. After talking with a Department of Housing and Urban Development (HUD) Counselor, meeting with a reverse mortgage specialist, and discussing the options with her advisors, she decided that a reverse mortgage was her best option. “I was able to make needed repairs to my house, pay-off my existing mortgage loan and several medical bills and obtain a monthly check to supplement my social security. This loan has been a blessing.”
What is a Reverse Mortgage?
A reverse mortgage is a loan against the equity in your home that provides tax-free cash advances, but requires no payments during the term of the loan. In short, it is a home mortgage where the lender pays you, rather than the other way around. The loan is not due and payable until the last surviving borrower no longer occupies the home as a primary residence, sells, or passes away. Like Mildred, many seniors have two primary goals when considering a reverse mortgage: 1) remaining in their homes, and 2) accessing their equity tax-free without selling or incurring additional monthly obligations.
Who qualifies for a reverse mortgage?
You must be at least 62 years of age, own your home and live there as your primary residence. Unlike a traditional mortgage, there are no income or credit requirements to qualify. You can qualify for a reverse mortgage even if you have an existing traditional mortgage on the home. Just like a traditional refinance, the existing mortgage is paid off with the proceeds of the reverse mortgage.
Are there restrictions on the proceeds?
The proceeds can be used for normal living expenses, home repairs or improvements, long-term health care or the purchase of a long-term care insurance policy, retirement and estate planning, medical bills and precription drugs, travel, or any other needs you may have.
There are three different ways to receive the proceeds: 1) all at once, in a lump sum of cash; 2) as a line of credit; or 3) as a regular fixed monthly payment. You can choose one method or a combination of these payment methods. For example, you could take some of the available funds at closing for immediate needs and home repairs, put some aside in an equity line for future large expenses and take the remainder as a fixed monthly payment. Fixed monthly payments are paid to you over your entire life, regardless of how long you live, as long as you own and occupy the home.
The most popular reverse mortgage, called a Home Equity Conversion Mortgage, or HECM, is insured by the Federal Housing Administration (FHA). Other reverse mortgage products include Fannie Mae’s Homekeeper and several proprietary products. These loans generally will not provide as much cash availability for a given property value as the HECM, but the maximum loan limits are much higher.
A reverse mortgage is only one of the options available for someone facing the issues of aging. Seniors considering a reverse morgage are required to talk it over with a HUD approved counselor before completing the application process. Be sure to select a lender that is proficient in reverse mortgages; not all lenders offer or are knowledgeable about the products.
You can locate a counselor by calling your local AARP or HUD office. You can also obtain information on their web sites at www.aarp.org/revmort, and http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmhome respectively. A reverse mortgage specialist is also needed to work with you and your advisors to help assess your individual situation and choose the product that is right for you.
By Robert M. Bregitzer, CPA