Most people have a mortgage and understand how traditional mortgages work. They may know little about a reverse mortgage, however. Put simply, a reverse mortgage is a home equity loan that does not have to be paid back until you no longer live in the home.
The most common type of reverse mortgage is a Home Equity Conversion Mortgage. The Federal Housing Administration created this type of mortgage in 1989. It is intended for people in their retirement years. In fact, one requirement is that you must be 62 years old or older.
Other requirements include a substantial amount of equity in your home. This could mean you own the home outright or have a low mortgage balance that could be paid off with proceeds from the reverse mortgage. You must also reside in the home and pay all property taxes and insurance.
No monthly payments are due on the loan; therefore, no income or credit scores are required. The Federal Housing Administration requires that all applicants receive independent counseling from a third party. A certificate of completion is required, which is submitted to the lender.
Payments can be made on the loan, but they are not necessary. The reverse mortgage is due when the borrower dies or no longer lives in the residence. The borrower’s heirs pay back the loan and interest. They have 12 months to either sell the house and pay back the loan or refinance.
If the loan is not repaid, the lender can foreclose on the property. If funds from foreclosure are not sufficient to pay back the loan, government insurance will make up the difference. The purchase of this type of insurance is another requirement of obtaining a reverse mortgage. After the loan and interest are repaid, any excess funds are dispensed to the heirs.
Reverse mortgages best benefit individuals who need extra income and who plan to stay in their home for a long period of time or for the rest of their lives. Cash received from a reverse mortgage is not considered income and is not taxed. It also does not affect Social Security or Medicare. It may affect eligibility for need-based local or state assistance.
A reverse mortgage is not for everyone. For those who find themselves later in life needing the extra income, it might be beneficial. If you are interested, do your homework, crunch the numbers and figure out if a reverse mortgage is for you.
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