Imagine getting income from your home each month, versus making a monthly mortgage payment. Does it sound too good to be true? A reverse mortgage allows a homeowner of retirement age that has substantial equity to borrow against the value of the home.
According to the National Reverse Mortgage Lenders Association, homeowners 62 and older held $65 trillion in home equity in the third quarter of 2017, the most recent year that figures were available. A homeowner that is at least 62 years old, owns a home free and clear -- or has at least 50 percent equity -- and meets certain other requirements may be able to utilize the equity as a source of income in the form of a loan.
A reverse mortgage allows a homeowner to tap into the equity without selling their home. Depending on the homeowner’s financial goals, the funds may be disbursed as a lump sum, a line of credit or monthly payments. Unlike a traditional mortgage used to buy a home, a reverse mortgage doesn’t require the homeowner to make any loan payments. In this case, the lender is paying the homeowner. However, the homeowner must still pay property taxes and insurance premiums, along with maintaining the home.
Also, it is a requirement that the homeowner remain in the home as a primary residence. Once the homeowner moves permanently, goes to a nursing home or assisted care facility for more than a year, or dies, the loan becomes payable in full and is paid off by the sale of the home.
This may sound simple, but it’s not. Reverse mortgages are complicated and homeowners may fall prey to scams if they have not researched the reverse mortgage product and the lender. Not every lender offers reverse mortgages because they are a specialty product. Bankers and financial planners can recommend these types of lenders, and the website for National Reverse Mortgage Lenders Association (nrmlaonline.org) has a vendors tab where you can browse through pages of legitimate lenders.
The homeowner should complete multiple loan applications to see which lender has the best fee structure for the particular financial situation. There are federal guidelines for lenders to follow so that the loan doesn’t exceed the value of the house and the homeowner’s heirs won’t be responsible for the balance if the home’s value drops.
Pros of a reverse mortgage:
• Flexible disbursement options such as monthly, lump sum or line of credit
• Homeowner lives in the home while receiving payments
• Heirs are not liable for paying off remaining balance if it exceeds home value
• Eliminates existing mortgage
• Proceeds are not considered income but homeowner is required to continue to pay property taxes, insurance and maintain the home. It is imperative that the homeowner consult with a financial adviser or appropriate government agency regarding taxes.
Cons of a reverse mortgage:
• Value of estate may decrease while interest on loan balance increases.
• Fees are typically higher than traditional mortgages.
• Need-based government programs such as Medicaid may be affected by proceeds. A homeowner should consult a financial adviser or appropriate government agency.
• Some homeowners outlive the mortgage proceeds.
Homeowners considering a reverse mortgage need to do some research before meeting with a lender. The Department of Housing and Urban Development (HUD) requires all prospective reverse mortgage borrowers to complete a 90-minute counseling session, which can answer many questions regarding a reverse mortgage and your personal financial situation.