A reverse mortgage allows you to receive money in exchange for the equity in your home without requiring you to make monthly payments. The loan will not have to be paid back until you (or any co-owner) no longer lives in the home.
The total debt becomes due when you sell your home, move to another principal residence, or pass away. Unlike a regular mortgage or home equity loan, no monthly payments are required, and you are able to turn your equity into income. The main disadvantage in a reverse mortgage is that the equity in your home will decrease as you borrow more money because the creditor has a lien on the property in the amount of the money that you borrow, as well as the interest that the money you borrow accrues. Over the years, you can end up depleting all of the equity in your home, leaving your heirs with no choice upon your passing but to sell the property to satisfy the loan.
The Home Equity Conversion Mortgage
The most popular form of reverse mortgages is a Home Equity Conversion Mortgage (HECM), which is a federally guaranteed loan. To be eligible for a HECM, you must be 62 years old or older, and own a home. A HECM does not have income requirements or restrictions on how you use the money you borrow. The loan proceeds are quite flexible, and can be paid in a lump sum payment, multiple monthly payments, or applied to a line of credit. The amount of money that you may be eligible to borrow depends on your age, the value of your home, and the existing interest rate. Because equity is required for eligibility, your home must either be paid-in-full, or have an existing mortgage balance that is small enough to be paid off with the proceeds of the loan. If the house is sold or refinanced by your heirs, any money available after repayment of the loan will go to the heirs of the estate. Because HECM loans are federally guaranteed, HUD (The Department of Housing and Urban Development) will pay the lender any shortfall should the house be sold for less than the total amount owed on the loan at the time of sale.
The homeowner is still responsible for paying all property taxes and homeowners insurance, and the creditor may be able to require repayment of the loan if you are not able to fulfill these obligations.
Reverse mortgages can benefit someone who meets the eligibility requirements and needs to turn their equity into a lump sum payment or a steady monthly income. They are particularly effective for individuals who intend to stay in their homes for a long period of time, and don’t mind if their house must be sold upon their death.
The Pros and Cons of Reverse Mortgages
|Turns Equity into Income
A reverse mortgage is one of the few ways in which somebody with little or no income is able to obtain a loan. The homeowner is able to borrow money against the equity in their home.
|Doesn’t Count As Income
In most cases, the income from a reverse mortgage does not adversely affect Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds must be used immediately. The loan proceeds are typically tax-free because the loan will have to be repaid at some point.
|No Income Restrictions
Most reverse mortgages do not have any income requirements, and you can have little or no income and still qualify for a reverse mortgage.
How you receive the loan (monthly, in a lump-sum, or through a line of credit) and what you use the money for (home repairs, debt repayment, living expenses, etc.) is generally up to you.
|Heirs May Lose Out
Since the loan must be repaid upon the death of the last surviving borrower, heirs will be forced to sell the home if they can’t repay the loan any other way.
|Rising Debt, Falling Equity
The equity in your home will decrease every time money is borrowed against it.
For a federally guaranteed HECM reverse mortgage, you must be at least 62 years of age and living in your home as a principal residence. Your home must either be paid-in-full or have a relatively small outstanding mortgage.
|Fees and Costs
As with most loans, you will be responsible for a variety of costs and fees when obtaining a reverse mortgage. You will also have to pay the lender interest on the loan.
Consider a Reverse Mortgage If…
- You are 62 years of age or older
- You are a homeowner
- Your home is either paid-in-full or has a small mortgage
- Your budget shows that you don’t have enough income to meet all of your expenses
- You don’t have enough income for a Chapter 13 bankruptcy and have too much equity in your house for a Chapter 7 bankruptcy
- You intend to stay in your home for a long period of time.