Your Primer on Reverse Mortgage:
I’m not sure I like the name, mostly because it confuses people, but let’s talk about reverse mortgages. In this brief article I will describe what a reverse mortgage is, review the types of reverse mortgage, and give you enough information and resources so you can make you own decision. You have probably heard that a reverse mortgage pays YOU and that’s why you want to learn about it. If you are over 62 years old and own a home, you may be able to use the equity that you have built into that home and get a reverse mortgage and not have to give up your home or encounter additional bills.
First let me establish an understanding of what a mortgage is. On a “normal mortgage” you get a loan to buy a home and you sign two major documents with the bank. The first one is a promissory note. This note specifies the interest rate and the term of the loan and basically says “I promise to pay”. The second document is a mortgage. The mortgage says, “If I don’t pay or do all the things I said I would do in the first document, you can take my house”.
On a “reverse mortgage” you are also borrowing the money and you are charged interest, but in most cases you do not get the money in one lump sum, you get it in the form of monthly payments. You also sign two main documents just like in a “normal mortgage”: a note document and a mortgage. The note document specifies the interest rate that will be charged, and the terms during which you will get the money you borrow against your house. The second document – the mortgage document – specifies under what terms the lender recovers the amount of money you borrowed. Normally the amount you borrow is paid to you monthly and the total amount that is owed grows accordingly. When you sell your home that money will be paid back to the lender from the proceeds of your house.
Why would you get a “Reverse Mortgage”? Let say you live in a house that is worth $400,000 and your retirement income is just barely paying the bills. But you own the house free and clear (or with a small traditional mortgage). You certainly have equity in your home, but no one is going to loan you money on a traditional home equity loan, because you have no way to pay it back. Bingo – you get a reverse mortgage for monthly payments to you and you now can stay in your house comfortably. For most reverse mortgages you do not have to repay the loan until you die or move out of the house for at least 12 months. Nearly all reverse mortgages are insured by FHA. And with the Home Equity Conversion Mortgage (HECM), the government pays the lender if the house sells for less than the loan’s balance. When the loan comes due, the homeowner will never owe more than what the home is worth. Any leftover equity will go to the homeowner or to the heirs.
Here are some things you need to know:
- Borrowed money is always tax free. So if you get an additional $1500 a month, that income will not be counted as taxable
- Up front expenses (points) can be high, be sure to shop around.
- The reverse mortgage is always calculated on the youngest home owner.
- The mortgages are insured by the Federal Government
- You may be able to take the money
- In a single disbursement
- Fixed payments for a certain time period (a “term” option)
- You can choose a “tenure” option which pays you as long as you live.
- You may choose a line of credit that you can draw when you need to
- You may choose a combination – for example a lump sum to an existing mortgage and then monthly payment
- Your home must be a full time residence and must meet HUD standards
- DO NOT get your reverse mortgage from someone trying to sell you something else, like home improvements.
For more detailed information visit The Federal Trade Commission Consumer Information.