One of the important things to keep in mind when researching the question, “What is a reverse mortgage?”, is that the details of particular reverse mortgage loans may vary from person to person and loan to loan. Reverse mortgages are a financial product specifically designed for homeowners aged 55 and older. They allow homeowners to tap into their home equity without having to sell their homes or make monthly mortgage payments. Instead, the lender makes payments to the homeowner or establishes a line of credit based on their equity, effectively converting a portion of the home’s equity into cash.
Reverse Mortgage Details:
- Eligibility:
To be eligible for a reverse mortgage, you must be at least 55 years old and have a significant amount of home equity. - Loan Types:
There are several types of reverse mortgages, but the most common one is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). HECM loans are regulated and have certain protections for borrowers. They are only available to people aged 62+. The other type of reverse mortgages are known as proprietary reverse mortgages. They are private loans done through various lenders and depending on your state, are available to those aged 55+. - Loan Disbursement:
With a reverse mortgage, you can receive funds in various ways, such as a lump sum, monthly payments, a line of credit, or a combination of these options. The choice depends on the type of loan you choose and your financial goals. - No Monthly Mortgage Payments:
Unlike traditional mortgages, with a reverse mortgage, you do not need to make monthly mortgage payments. Instead, the loan balance grows over time as interest accrues. The loan is typically repaid when you sell the home, move out, or pass away. - Staying in Your Home:
One of the most significant benefits of a reverse mortgage is that you maintain the title and ownership of your home. Only upon a maturity event can the loan be called due. Read more about a reverse mortgage maturity event by checking out our FAQ page here: (link to FAQ page please)
The Benefits of a Reverse Mortgage
Reverse mortgages offer several advantages for retirees and seniors:
Supplement Retirement Income:
A reverse mortgage can provide a valuable source of tax-free income during retirement, helping seniors cover daily living expenses, healthcare costs, and other financial needs. This income can be used as part of the coordinated withdrawal strategy of maximizing wealth in retirement.
Flexibility:
Reverse mortgages offer flexibility in how you receive the funds, giving you the freedom to choose a payment option that suits your financial situation. Or, don’t take the funds at all! If you don’t need the funds they can sit in the line of credit and accrue over time, giving you access to more cash later in life when you may need it the most. Studies show life gets more expensive as you age.
Tax Benefits:
The proceeds from a reverse mortgage are not considered taxable income, which can be advantageous for financial planning purposes. Want to control your AGI? Consider a reverse mortgage.
Control:
The title to your home remains in your name. You retain the ownership and control over your home through the life of the loan.
Considerations and Caution
While reverse mortgages can be a valuable financial tool, they are not without their considerations and potential downsides.
- Costs:
Reverse mortgages come with various fees, including closing costs and mortgage insurance premiums. It’s essential to understand these costs and factor them into your decision. These costs are included in the loan balance, so they are not required to be paid out of pocket unless your loan is short to close and/or you desire to pay them out of pocket. The fees for HECM reverse mortgages are regulated and capped by the federal government. - Loan Repayment:
While you don’t need to make monthly mortgage payments, the loan balance will increase over time due to accruing interest. This can impact the amount of equity left in your home. - Eligibility and Counseling:
Before obtaining a reverse mortgage, you are required to attend a reverse mortgage counseling session to ensure you fully understand the terms and implications of the loan. This session is usually a phone call that takes less than an hour. When you request a proposal, a list of 3rd party counselors will be provided for you to inquire with.
How Are Payments Received?
Another question often asked is “How will the cash be paid out?” Payment can be made in various ways depending on the client’s choice. For example, monthly payments to borrowers, a lump sum, either for the entire amount or for part of it. Additionally, a line of credit may also be available for the borrower to use. The payment structure might also be made up of some combination of these. With the multiple payment options available, there is a lot of flexibility with this type of loan, making them ideal for many seniors.
Learn More!
For more information, please feel free to get in touch with us. Our reverse mortgage experts have a wealth of experience in this industry, so you can rest assured that they will be able to help answer all of your questions. You can call us at 800-791-5626 or fill out our online contact form. We would be happy to help with all of your reverse mortgage loan needs.