What is a Reverse Mortgage?
Until recently, there were two main ways to get cash from your home:
- You could sell your home and move to another residence
- You could borrow against your home and receive a lump sum in the form of a
home equity loan or establish a home equity line of credit. In both cases, once
you receive the money, you have to make monthly loan repayments in order to stay
in your home.
Reverse Mortgages give you a third way of getting money from your home. You
don't have to sell your house and move or repay a loan, which can be
particularly difficult when living on a fixed income in retirement (if you can
even qualify for the loan without a monthly paycheck).
A Reverse Mortgage is a loan against your home that you do not have to pay back
for as long as you live there. You pay the money back plus interest when you
die, sell your home, or permanently move out of your home.
How is money paid to me from a Reverse Home Mortgage?
Reverse Mortgages enable you to turn the value of your home into cash to fund your retirement
plan. Reverse Mortgages can be tailored to your needs. Depending on the type of Reverse Mortgage
you choose, you can take cash out of your home:
- In a single lump sum
- As a regular monthly cash advance, similar to an annuity for retirement income
- As a credit line account that lets you customize when and how much is paid to
you - changing over time as your needs change
- As a combination of these payment methods
Is anyone eligible for a Reverse Mortgage?
Borrowers must be at least 62 years of age for most Reverse Mortgages and
generally must occupy the home as a principal residence (you must live there
the majority of the year).
Single family one-unit dwellings are eligible properties for reverse mortgages.
Some programs may also accept 2-4 unit owner-occupied dwellings, along with some
condominiums, planned unit developments, and manufactured homes. Generally
homes that are less than a year old are not eligible.
What happens if I receive a monthly cash advance with a Reverse Mortgage and outlive the
total home equity in my house?
With a Reverse Mortgage, you will never owe more than the value of your house.
In this regard, a Reverse Mortgage is part loan and part insurance product - the
Reverse Mortgage lenders are pooling their risk across many customers and making
a calculated bet that most will pay back the loan in full with proceeds from the
future sale of their home.
You're not making any bets with your retirement income planning. You can
continue living in your home and enjoying enhanced retirement income from your
Reverse Mortgage, even if what you owe the Reverse Mortgage lenders has exceeded the value
of your home. You will continue to receive any payments that you are due from the
Reverse Mortgage no matter what the balance on the loan is. When you move out of your house,
you will only owe the current value of the house and nothing more.
What are the tax implications of a Reverse Mortgage?
Each situation is unique and you should consult a tax advisor, but generally,
Reverse Mortgages provide tax-free income through the equity release from your
Money from a Reverse Mortgage is tax deductable, in the manner of a normal mortgage.
However, unlike a normal mortgage, you cannot normally write off the interest accrued
on a reverse mortgage until you actually repay the loan.
How does a Reverse Mortgage compare to a home equity loan?
Both products offer you money now - using your house as the source of funds
Home Equity Loan:
Taking a loan to buy or refinance your home means borrowing from the bank, and
you will need to immediately start making payments on that debt to increase the
equity in your home.
- Advantages of Home Equity Loans vs a Reverse Mortgage: The important advantage of a home equity loan is that the fees are
usually lower than for a Reverse Mortgage, and the amount of money you qualify for may be higher.
In addition, the interest charged is usually tax-deductible. Home equity loans might be most
appropriate for short term cash needs or if you
plan to move soon.
- Disadvantages of Home Equity Loans vs a Reverse Mortgage: The big disadvantages are that you have to make loan payments,
which can be challenging if you are living on a fixed income in retirement. And,
many people in retirement do not have enough income to qualify for the loan. It
is also possible to default on a home equity loan and lose your home.
A Reverse Mortgage is the reverse or opposite of a home loan - some call home
loans "forward mortgages". Instead of making payments on your home, you earn
income from your home. With a Reverse Mortgage, your debt balance gets larger
while your equity and possibly the value of your estate decreases.
What are the risks of a Reverse Mortgage?
Reverse Mortgages do not generally affect Social Security, Medicare or pension
benefits. However, if you are currently eligible for Medicaid or other
low-income help from the government, you need to be careful that income from a
Reverse Mortgage does not eliminate your eligibility for these public programs.
What are the costs of a Reverse Home Mortgage?
Costs of a Reverse Home Mortgage include:
- Origination fee
- Closing costs
- Servicing fee
- Mortgage insurance premium
- Interest expense
- Insurance or maintenance costs to bring the home up to FHA standards
It is important to note two things:
- The Good News: These costs can usually be financed from the proceeds of your
- The Bad News: These costs can be significant. Generally speaking, if you don’t
think that you will remain in the house for longer than another five years, a
Reverse Mortgage might not be the most financially advantageous decision.
How much retirement income can I expect with a Reverse Mortgage?
Your benefits will be determined by the following factors:
- The appraised value of your home
- The maximum lending limit
- Your age
- The current interest rate
How can I use money from a Reverse Mortgage?
Generally, there are no restrictions on how you use money from a Reverse
AARP and the U.S. Department of Housing and Urban Development (HUD) conducted a
survey of Reverse Mortgage borrowers to learn how they used the proceeds from
their Reverse Mortgages. They found that households used Reverse Mortgages in
the following ways:
- Hospital/healthcare costs
- Repay existing mortgages
- Reduce the financial burden on children supporting them
- Home repair/improvement
- Pay property taxes
- Daily expenses
- Travel, something special
Additionally, using a Reverse Mortgage as an estate and retirement planning tool is
particularly advantageous - see Innovative Uses for a Reverse Mortgage for more
What is an HECM?
HECM is an acronym for Home Equity Conversion Mortgage - a federally insured
Reverse Mortgage – and currently the only Reverse Mortgage program widely available.