Owning a Home
Reverse Mortgages: Use with Care
A reverse mortgage is similar to a home equity loan, but has several important differences and is available only to homeowners who are at least 62 years old.
Basically, a reverse mortgage converts the equity in your home to cash that you can use for any purpose, including basic needs during retirement or illness. It is called a reverse mortgage because, instead of you making regular payments to a lender, the lender makes a lump sum payment or regular payments to you. And those payments generally are tax free.
Sounds good, right? It can be, but reverse mortgages are not suitable for everyone.
Seniors should carefully weigh the merits, risks and (often substantial) costs of the transaction to ensure it meets their long-term financial objectives. This is a major step and seniors should consult with licensed financial, legal and tax professionals - and their friends and relatives - before taking it.
Here are some basics:
- Introduced in the late 1980s, reverse mortgages can help homeowners who are "house rich but cash poor" to remain in their homes and receive the income needed to maintain their lifestyle.
- Generally, as long as one spouse is alive and lives in the home, the debt does not need to be repaid. But you or your estate must repay the money when you move, sell the property or when all owners have passed away.
- To qualify for a reverse mortgage, you must be at least 62 years old and have paid off a good part of your mortgage - giving you considerable equity in your home. Income and medical history are not considered and medical tests are not required.
- Some types of reverse mortgages:
- Home Equity Conversion Mortgage (HECM), administered by the U.S. Department of Housing and Urban Development. These mortgages are backed by the federal government and account for most reverse mortgages.
- Proprietary reverse mortgages offered by banks, mortgage companies and other private lenders.
- Single purpose reverse mortgages offered by state or local governments.
- Depending upon whom you choose to handle your reverse mortgage, payment options vary. You may choose to receive your money all at once in a lump sum, fixed monthly payments for life, or a line of credit from which you draw amounts as the need arises. The line of credit is the most popular choice.
- Homeowners retain title to their home and remain responsible for taxes, insurance, utilities, maintenance and other housing expenses.
- The money provided to you from a reverse mortgage is tax-free and does not affect Social Security or Medicare payments. It could, however, affect other kinds of government assistance such as Medicaid so check with your local agency on aging or visit www.eldercare.gov.
More information and various calculators are available at: www.financialfreedom.com
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