Older adults facing financial challenges are increasingly turning to reverse mortgages to help pay medical expenses, boost their income, or pay for unexpected repairs. With a reverse mortgage, there are no restrictions on how you use the money and it can be a good option for seniors.
With a regular mortgage, you take out a loan and make regular monthly payments to the bank or other lender. But with a reverse mortgage, the lender pays you money – either in a lump sum, monthly, or some combination of the two – and you don’t have to pay it back for as long as you live in your home. The reverse mortgage acts as a loan that is repaid when you die, sell your home, or when the home is no longer your primary residence.
Any homeowner aged 62 or older is eligible for a reverse mortgage. The proceeds are usually tax-free and most do not have any restrictions on income. As long as you live in the home, you will not have to pay monthly payments, but you must remain current on your tax and insurance payments. When the last surviving homeowner dies or moves out, the estate has 6 months to repay the balance. Often, this is accomplished by selling the home and paying out the balance. Any equity that remains in the home is kept by those who inherit the estate. If the home sells for less than the balance of the reverse mortgage, the estate is not personally liable for the difference.
Home Equity Conversion Mortgages, or HECM, are the most widely available reverse mortgages. You will be required to meet with a counselor from an independent government-approved agency before applying for an HECM. The counselor will explain the costs and benefits to you and make sure you understand the alternatives to an HECM loan. There is generally a fee for this service, but it can be deducted from the loan.
The amount you can borrow with an HECM reverse mortgage will be determined based on the age of the youngest homeowner, the type of loan you choose, current interest rates and the appraised value of your home. The more equity you have, the more you can borrow.
When considering a reverse mortgage, remember that the balance you owe will grow over time because interest will be added to the outstanding balance. There are many resources available to learn about reverse mortgages, and many websites include a mortgage calculator that can help you figure out how much income your home could generate. Be wary of high-pressure sales pitches and make sure you understand all the financial implications before you sign. You will, however, have three days to cancel any reverse mortgage after signing.
Depending on the circumstances, older adults can benefit from the equity they have earned over the years that they have paid their mortgage by using a reverse mortgage.