What is a Reverse Mortgage?

A reverse mortgage allows homeowners, typically those aged 62 or older, to borrow against the equity in their home. Unlike a traditional mortgage, where you make payments to the lender, with a reverse mortgage, the lender pays you.

The loan first settles any existing mortgage, and you can use the remaining funds however you choose. However, you are still responsible for property taxes, homeowners insurance, and maintaining the property.

Reverse mortgages are designed for older homeowners who want to eliminate their monthly mortgage payments or supplement their retirement income.

Eligibility for a Reverse Mortgage

Not everyone qualifies for a reverse mortgage. Some standard eligibility requirements include:

• You must be 62 years or older.
• The loan can only be taken on your primary residence.
• For Home Equity Conversion Mortgages (HECM), HUD requires you to attend a reverse mortgage counseling session.
• You’ll need to pass a financial assessment to ensure you can meet the loan’s obligations.
• You cannot have any federal debt, such as student loans or unpaid taxes.
• The property must meet specific standards.

How a Reverse Mortgage Works

A reverse mortgage allows you to borrow against your home’s equity, which is the difference between your remaining mortgage balance and the current value of your home.

The lender will order an appraisal to determine how much you can borrow. For example, if your home is worth $350,000 and you owe $100,000, you could potentially borrow against the $250,000 in equity. However, you won’t typically be allowed to borrow the full amount.

Paying Off Your Current Mortgage

The proceeds from the reverse mortgage first pay off your existing mortgage, meaning no more monthly mortgage payments are required.

Depending on the loan option, you could receive payments in a lump sum, monthly installments, a line of credit, or a combination of these. It’s important to note that receiving reverse mortgage payments may affect your eligibility for need-based assistance programs, so it’s recommended to consult a financial advisor.

Your Obligations After Taking Out a Reverse Mortgage

You must continue to pay property taxes, homeowners insurance, and any homeowners association dues. While the reverse mortgage covers your monthly mortgage payments, you’ll also be responsible for closing costs and origination fees.

You don’t have to repay the reverse mortgage until you sell the home, move out, or pass away. If you sell the home, the proceeds are used to pay off the loan, and any remaining funds are yours to keep.

Options for Heirs

When you pass away, your heirs have several options for handling the reverse mortgage. They can:

• Purchase the home for the loan balance or 95% of the appraised value, whichever is lower.
• Sell the home, pay off the loan, and keep any remaining proceeds.
• Turn the home over to the lender to satisfy the debt.

Advantages of a Reverse Mortgage

• Stay in your home: A reverse mortgage eliminates monthly mortgage payments and provides additional income, making it easier to afford staying in your home.
• Tax-free funds: Reverse mortgage payments are not considered taxable income.
• Flexibility for heirs: Your family members will have multiple options to manage the loan repayment when the time comes.
• Increased financial security: By eliminating your mortgage payments, you can use your income for other expenses during retirement.
• Access to home equity: You’ll be able to tap into your home’s equity, which can be significant if you’ve owned the home for a long time.

Disadvantages of a Reverse Mortgage

• Decrease in home equity: Borrowing from your home’s equity reduces what your heirs will inherit or what you can gain if you sell the home.
• Impact on other benefits: A reverse mortgage may affect eligibility for certain need-based programs, such as Medicaid.
• Complications for heirs: Your heirs could face challenges, such as larger loan balances than anticipated.
• Fees involved: You’ll still need to cover various costs, including origination fees, closing costs, and servicing fees.
• Risk of scams: Older homeowners are often targeted by reverse mortgage scams. Make sure to work with reputable lenders who clearly explain the terms.

Repayment of a Reverse Mortgage

Repayment depends on your situation:

• If you sell the home: The loan balance is paid off with the sale proceeds, and you keep the remaining funds.
• If you pass away: Your heirs can either sell the home and pay off the loan or buy the home by paying the loan balance.
• If you move out: You must repay the loan if the home is no longer your primary residence for more than half the year.

Reverse Mortgage vs. Refinancing: Which is Better?

While a reverse mortgage can provide additional income in retirement, it may not be the best option for everyone. Alternatives like refinancing might be more suitable, especially if you plan to leave the home to your heirs. For example, a cash-out refinance can provide you with a lump sum of cash while keeping your home’s equity intact. However, if you pass away before repaying the loan, your heirs will need to pay off the remaining balance.Consider Your Options Carefully Reverse mortgages can be beneficial for older homeowners needing additional income, but they come with risks. Consult your Mortgage Advisor, Dustin Dumestre (Brokered Loan Officer) to explore all your options, including refinancing, to determine which choice is best for your financial goals.