Reverse mortgage

If you ask older adults where they want to live, many will say they want to live at home. Reverse mortgages can give seniors who own their own home outright, or even if they have a small mortgage, extra funds to live at home, provide care for a spouse, buy a new home, or just have money available in case of emergency.

What is a reverse mortgage?

A reverse mortgage is also called a Home Equity Conversion mortgage. The Federal Housing Administration regulates these mortgages.  A borrower does not have to pay any monthly mortgage payments. The borrower is responsible for maintaining the home, and paying taxes, insurance, and HOA fees (if applicable).  The borrower also has to live in the home.

 How do you qualify for a reverse mortgage?

The oldest borrower has to be at least 62 years old. To protect the homeowner the Federal Housing Authority requires borrowers to participate in a counseling session to review the terms of the loan.

 When do you have to pay a reverse mortgage back?

A reverse mortgage does not have to be repaid as long as the homeowner continues to live in the home, maintain the home, and pays taxes and homeowners’ insurance. If a homeowner moves out for a non-medical reason, or moves into assisted living or a skilled nursing facility for 12 or more months then the home is considered vacated. The loan would need to be re-paid. However, if there is a co-borrower, the co-borrower can remain living in the home, even if the homeowner dies. In general, a reverse mortgage is repaid when the borrower passes away and the home is sold. Alternatively, heirs can decide to pay back the reverse mortgage and keep the house. Reverse mortgages can also be repaid early, even while the homeowner is living.

 How much money can a borrower get from a reverse mortgage?

The payment amount depends on the borrowers’ age, whether there is an existing home loan, the appraisal value of the home, and the current interest rates.

How much does a reverse mortgage cost?

Many of the fees are similar to a traditional home loan. It is possible to roll the fees over into the reverse mortgage to reduce many of the out-of-pocket expenses of paying for the loan.

How is the loan paid out?

Homeowners can pick a one-time lump payment, monthly payments, or keep the funds in a home equity line of credit. Some lenders allow a combination of payment types.

Does the bank own the home?

The bank does not own the home. Homeowners still need to maintain the home, and pay property taxes and homeowners insurance.

Will the bank tell me how I have to spend the money?

Homeowners are free to spend the money as they wish.

What are the drawbacks of a reverse mortgage?

  • A reverse mortgage is a type of loan. Interest accumulates the longer a borrower has the loan. There are safeguards in place so the loan amount is never more than the appraised value of the home, however, heirs may not have the cash reserve to repay the reverse mortgage.

 

  • The loan becomes due if a homeowner no longer lives in the house. This may be a problem if the homeowner moves into assisted living, and cannot afford the costs of paying back the loan and paying the assisted living facility.

 

  • Homeowners need to be able to maintain their home, and pay ongoing costs such as taxes and insurance.

 

  • Paying back reverse mortgages includes the initial loan amount, accumulated interest, and any deferred fees. This may not be best for homeowners who are thinking about moving.

 

Reverse mortgages are not for everyone. A reputable lender can discuss reverse mortgages, as well as other loan options.  A homeowner should never be pressured into making a quick decision.

 

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