A reverse mortgage is a fairly new way for many retirees to supplement their retirement income. It allows the homeowner to take advantage of the equity in the home by turning it into cash while still allowing the homeowner to remain in residence. The money from the reverse mortgage is not taxable and cannot affect Social Security or Medicare benefits. For some retired homeowners, it is an excellent solution to their fixed income problems.
In addition to providing extra income for retirees, in some cases taking out a reverse mortgage can even save their home. While property taxes often rise, fixed incomes do not, and a reverse mortgage can give retirees the money they need to pay their property taxes and keep their home.
Here is how it works. The borrower takes out a loan based on the equity that has built up in the home. Unlike traditional loans, a reverse mortgage does not need to be paid back until the homeowner either sells the home or dies. The amount of the reverse mortgage plus interest is paid back to the lender when the home is sold or the lender may take possession of the home. Any profit that is left over goes to the homeowner or his beneficiaries.
If you are considering taking out a reverse mortgage on your home, here is what you should know.
- In the United States, reverse mortgages are available only to those 62 and older who live in their homes.
Lenders will lend to those who still have a mortgage on their home, but usually the mortgage must be paid down substantially and a lot of equity must be built up in the home.
There are three types of reverse mortgages that are available.
Home Equity Conversion Mortgages - These reverse mortgages are guaranteed by HUD and the Federal Housing Authority. There are various payment options such as lines of credit which can appreciate with the equity of the house or monthly installments.
Homekeeper Reverse Mortgage - This is offered by Fannie Mae and is guaranteed by the institution. It often has lower closing costs than a HUD reverse mortgage but not as many payment options.
Private Cash Account - This is for homes that are usually worth over $500,000. It usually has the most flexibility in payment options of the three types of loans, but it also comes with the highest closing costs.
The process may be confusing because there are many reverse mortgage options. HUD offers free counseling for those considering a reverse mortgage. Consider using the HUD counselors or your own financial advisor to help you determine if a reverse mortgage is right for you and which reverse mortgage fits your needs the best.
Once you and your counselor or advisor determine the right reverse mortgage for you, it's time to make your application. Read the terms and conditions of your loan very carefully, and if you do not understand something, ask for clarification.
Reverse mortgages usually come with three options for payment. You can take the money in one lump sum, you can take the money as a line of credit to use only as needed, or you can take the money in monthly installments. Sometimes you can get a combination of the three. If you have the option of the type of payment you would like, determine which form of payment you want before you make your application.