A reverse mortgage is a type of home loan older homeowners can use to tap accrued equity in their house for cash. For older adults considering retirement and concerned whether they will have enough money to sustain their lifestyle or pay for their care, this may be a potential solution.
Funds acquired through a reverse mortgage can be a received as a lump sum, in monthly payments, or as a line of credit. Recipients can use the money to pay off debts, supplement other income, or pay healthcare expenses. The funds can also be used in combination with long-term care insurance and other private pay options to cover the cost of some supports and services.
The most popular reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
How Does a Reverse Mortgage Work?
Under a traditional mortgage, a lender provides money to an individual to buy or refinance a home. In exchange, the homeowner pays the borrowed money back to the lender plus interest over many years.
In a reverse mortgage homeowners borrow cash from their own home equity. The borrower does not make monthly payments to the lender. Instead, the lender makes monthly payments to the borrower based on the amount of accumulated home equity. The loan balance becomes due when the homeowner sells the house, is unable to live there for longer than 12 consecutive months, or dies.
It is recommended that you maintain a dedicated account to keep the reverse mortgage proceeds as to not co-mingle it with other funds. This is especially prudent in the event you would need to apply for Medicaid.
Seek Professional Counsel First
It is wise to take precautionary action before pursuing a reverse mortgage by speaking with a professional financial adviser. These loans can be costly if handled improperly, are complex to understand, and are subject to scams.
In addition, how long the homeowner expects to stay in the house should be considered. As lifestyle needs and levels of care change, older adults may move temporarily and cause the reverse mortgage to become due if they will be living somewhere other than their home for more than 12 consecutive months.
Residents in housing cooperatives cannot obtain reverse mortgages as detailed under FHA rules, since they technically do not own the real estate they live in, but rather own shares of a corporation.
There are numerous requirements homeowners must meet to apply for a reverse mortgage through the HECM program. Generally, the homeowner must:
Be at least 62 years old.
Be living in their home as their primary residence.
Have the financial resources to continue making payments such as taxes, insurance, and other fees.
Have sufficient home equity.
Not be delinquent on any federal debt.
The Department of Housing and Urban Development (HUD) has afull list of borrower, property, and financial requirementsfor homeowners seeking a reverse mortgage through the HECM program. In addition, applicants will meet with a HECM counselor to discuss program eligibility, financial implications, and alternatives.
Types of services and supports that can be used for Reverse Mortgages
Eligible borrowers can receive funds in the form of a lump sum, in monthly payments, or as a line of credit. The money can be used for any reason.
One of the most important advantages of a reverse mortgage loan is that, regardless of how much is borrowed, the borrower will never owe more than the value of the home. Also, borrowers can keep the difference if the loan balance is less than the home's value at the time of repayment.
Homeowners applying for a reverse mortgage through the HECM program receive mandatory counseling at low- or no-cost, which provides educational resources and guidance.
There are many factors to consider before deciding whether a reverse mortgage is the right financial choice, but it can be a useful retirement planning tool for older homeowners. In order to take full advantage of a reverse mortgage, it is critical homeowners take into consideration their financial and healthcare needs.