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FAQs - Senior Reverse Mortgages

Safe  -  Easy  -  Keep Your Home

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. 

Now, 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. 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 planning 

       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 (they 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, mobile homes and cooperatives are not eligible.

What happens if I create an annuity 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 home, even if what you owe the reverse mortgage lenders has exceeded the value of your home. 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 home.

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. The increased equity will likely increase the value of your heirs' inheritance.

       Advantage: The important advantage of a home equity loan is that the fees are usually lower than for a reverse mortgage. And, the interest charged is usually tax-deductible. They might be appropriate for short term cash needs or if you plan to move soon. 

       Disadvantages: 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. 

Reverse Home Mortgage:

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.

However, the typical costs over the life of the loan are higher (closing costs and interest on principal), but the risks are lower.

What are the risks of a home 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.

Reverse mortgage lenders that offer private reverse mortgages not backed by the federal government may default on future payments. It depends on the financial stability of that company. This shouldn't be an issue if you take a lump sum payment or borrow from a federally insured lender.

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 

It is important to note two things:

       The Good News: These costs can usually be financed from the proceeds of your loan and 

       The Bad News: These costs can be significant. Generally speaking, if you donít 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 - or the maximum lending limit. 

       Your age 

       The current interest rate 

Typically a federally insured home equity conversion loan will have a lower lending limit than those offered by private reverse mortgage lenders.

How can I use money from a reverse mortgage?

Generally, there are no restrictions on how you use money from a reverse mortgage.

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