A reverse mortgage is a way for seniors to increase their income while remaining in their home. When a senior takes out a reverse mortgage, the equity in the home is converted to cash. The senior then receives the money as a lump sum payment, a line of credit or a monthly payment. While reverse mortgages provide financial freedom for lots of seniors, they're not always the best option. It's important to carefully evaluate your personal financial situation, and speak with family members and credit counselors before taking out a reverse mortgage.
When choosing a lump sum payment, the borrower will receive a fixed amount. With a line of credit, the borrower will qualify for a fixed amount. In a monthly payment arrangement, the borrower will receive a fixed monthly amount for the remainder of their life.
The senior does not pay the mortgage back as long as she or he lives in the home. If he or she moves in with a child or enters long-term care, or sells the house for any reason, the mortgage must be repaid. Otherwise, the mortgage is repaid when the estate is settled.
There are several requirements the senior must meet in order to qualify for a reverse mortgage. They must be at least 62 years old and there cannot be any other existing mortgages on the property. If there are other debts on the property, they must be paid in full with the proceeds from the reverse mortgage. Besides the requirement to pay off an existing mortgage with the proceeds, there are no other restrictions on how the proceeds from a reverse mortgage can be used.
Before signing up for a reverse mortgage, anyone interested must speak with a housing and urban development certified counselor. This counseling is to make sure that anyone who signs up for a reverse mortgage understands exactly what the benefits and drawbacks are. The major concern for many people is that the reverse mortgage diminishes the value of the estate that a parent may pass on to a child. The reverse mortgage must be repaid with interest. This is often accomplished by selling the home.
The amount that a homeowner can receive through a reverse mortgage depends on a variety of factors. They include the actual appraised value of the home, whether any repairs are necessary on the home, if there are existing liens on the property and the current interest rate.
The age of the borrower is also relevant. The older the borrower, the more money they qualify to borrow. Another factor taken into consideration is how the payment is made. To get the maximum amount from a reverse mortgage, the borrower should opt for a line of credit. They will qualify to borrow the most, but will only use the credit as needed. The lump sum option provides cash payment immediately, but also charges the highest interest rate. The monthly payment option typically qualifies you for a conservative amount, but guarantees the amount for the remainder of your life.
Payments received from a reverse mortgage are not counted as income and do not affect most social security and Medicare payments. There is one exception, though. If a payment accumulates in a bank account for over one month, it is considered a liquid asset and may disqualify the recipient from receiving income-based health care. This can be a tricky area, and it is one thing that should be discussed with the lending counselors before borrowing any money.
Before making the decision to take out a reverse mortgage, it is important to realize that it is one of the most costly traditional borrowing mechanisms. If the borrower has sufficient home equity to allow them to tap into a reverse mortgage, they will probably also qualify for a home equity loan. The drawback to a home equity loan is that they require a monthly repayment plan. If there is money in the budget for an additional monthly payment, a home equity loan is less costly than a reverse mortgage.
Home equity lines of credit were designed to cover expenses such as roof repair or other maintenance issues. If, however, the borrower needs money for everyday living expenses, a reverse mortgage that provides monthly payments may be the only solution.
Before committing to any borrowing situation, it is important to pinpoint exactly why the money is needed and how borrowing will affect the estate. If the decision is made to borrow with a reverse mortgage, inform the person responsible for settling the estate so there are no surprises later. Settling the estate of a loved one is a stressful situation, so making sure the person responsible knows what to expect is important.