You’ve probably heard of a reverse mortgage, but do you know what a reverse mortgage is? A reverse mortgage, or Home Equity Conversion Mortgage (HECM), is a type of home loan for senior homeowners, 62 years or older, that uses the home’s equity as collateral. Cash payments are paid to a senior homeowner based on their home’s equity. A reverse mortgage provides cash payments to a senior homeowner by allowing them to convert part of the equity in their home into cash. Generally, the loan is not due until the last surviving homeowner dies, sells or moves out of the home. The homeowner is responsible for property taxes, homeowners insurance, upkeep and any relevant condominium fees.
When the last surviving homeowner dies, sells or moves out of the home, the estate must pay off the reverse mortgage or sell the home to pay back the loan balance. The estate has roughly 6 months to do so. If there is any remaining equity, the estate inherits the remainder. If the home sells for less than the balance of the reverse mortgage, the estate is not personally liable.
The idea for a reverse mortgage came about because retired senior homeowners with limited incomes needed a way to pay for health care and monthly living expenses. Thus, the reverse mortgage was created and without restriction on how it would be used by the senior homeowner. It allows senior homeowners to use the equity they have built in their homes to help them pay for health care costs and their basic monthly living expenses or take a vacation if they so choose.
A reverse mortgage differs from a traditional mortgage, because the lender pays the homeowner cash rather than homeowner making monthly mortgage payments.
A reverse mortgage can be a good way for retired homeowners to increase their spending power and financial security in retirement. However, there are 2 sides to reverse mortgages, benefits and drawbacks.
Benefits of a reverse mortgage:
- You can live in your home for as long as you want without a monthly mortgage payment and improve your immediate financial situation.
- You can tailor and utilize the reverse mortgage as a financial planning tool.
- Your home cannot be taken from you for non-payment as in a home equity loan. You do not make payments on the loan until you permanently leave the home.
- You will never owe more than the value of your home at the time the loan is paid off. This is a great advantage if you secure a reverse mortgage and then the price of your home drops.
- Whether you receive the money from a reverse mortgage as fixed income or in a lump sum, the money is typically tax-free.
- You may use the money from a reverse mortgage however you see fit.
- You can receive the money from a reverse mortgage in one lump sum, as annuity, a credit line or even as a combination of these.
- You maintain homeownership of your home and are able to live in your home.
- You can rest assured that you have a place to live for as long as you want when you secure a reverse mortgage.
- A reverse mortgage is federally insured.
- A reverse mortgage can increase your spending power and financial security in many ways.
Drawbacks of a reverse mortgage:
- Upfront fees on a reverse mortgage are high. (Learn more about reverse mortgage fees here: Reverse mortgage rates and fees)
- Even though you make no monthly payments on a reverse mortgage, the amount of interest you owe and the amount you must eventually pay back accumulates over time.
- You may have built a lot of equity in your home, but a reverse mortgage might allow you to use only some of it. The amount of your reverse mortgage loan is determined by the appraised value of your home, what you still owe on your home, your age and what the current interest rates happen to be.
- A reverse mortgage is the opposite of a traditional home loan. It is a mortgage in reverse. You accumulate the loan over time and pay it all back when you are no longer living in your home. This can be difficult to grasp.
The benefits of a reverse mortgage clearly outnumber the drawbacks, but a reverse mortgage is not for everyone. Here are three things to consider before securing a reverse mortgage:
- If you are eligible for low-income assistance, securing a reverse mortgage could disqualify you from Federal or State government assistance.
- If you are planning to move in the near future, a reverse mortgage is not a good idea since the loan is due when “the last surviving homeowner dies, sells or moves out of the home.”
- A reverse mortgage decreases the equity in your home and affects your estate. (See Innovative Uses of a Reverse Mortgage for more information on these options)
Studies have shown that more than 90 percent of those who have secured a reverse mortgage have less stress and the freedom to choose to live the life they want to live. Learn more about the fees associated with a reverse mortgage or instantly estimate your reverse mortgage loan amount with the Reverse Mortgage Calculator.
A Brooklyn real estate agent with Fillmore Real Estate, I have been collaborating with and helping my clients buy or sell their Brooklyn homes for over 27 years. Do you have further questions about a reverse mortgage? Contact me, Charles D’Alessandro, at (718) 253-9600 ext 206 or email [email protected]. I know real estate and will be happy to answer any questions you may have. Just ask!