Reverse mortgagesI don’t do Reverse Mortgages, however I do get a lot of questions regarding them. While not a Reverse Mortgage specialist, I have studied and learned a lot about them over the years. Hopefully this series will prove to be both helpful and informative. It is based on the most common questions my clients have asked over the years.

What Is a Reverse Mortgage?

It’s for:

  • Individuals age 62 or older.
  • Own the home they live in (property in which reverse mortgage will be attached).
  • Owe either a minimal amount on their mortgage balance (or)
  • Own it free and clear. 

For homeowners fitting this criteria, a reverse mortgage program can be a powerful financial vehicle one can use to receive extra income. A reverse mortgage allows an individual to leverage (borrow) the equity they’ve accumulated in their home without repaying the loan for as long as they live in the property. Instead of making monthly payments, qualified individuals receive monthly payments from their lender! That’s the “reverse” part.

Cash Flow During Your Retirement!

A reverse mortgage can be a powerful way to make the equity acquired in a home work for you. Today, there are more homeownership options for retired individuals and couples than ever before. Whether you’re looking to pay off bills, or would just like additional income to enjoy retirement, a reverse mortgage may be the answer for you!

Why Get a Reverse Mortgage?

Income received through a reverse mortgage can be used for a variety of purposes. Just like a regular refinance, you are not restricted in how to use the funds.

Below are a few examples of the potential uses for funds received through a reverse mortgage:

  • Supplement retirement income
  • Medical expenses
  • Invest in CDs, annuities, long-term care insurance
  • Make much needed home repairs or improvements
  • Pay for in-home care
  • Pay property taxes
  • And more…

Reverse Mortgage vs. Traditional Mortgages or Home Equity Loans

A reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage or home equity loan, you borrow a large amount of money and make monthly payments. You must also have a sufficient debt-to-income ratio to qualify and make monthly mortgage payments.

A reverse mortgage pays you and is available regardless of your current income or debt-to-income ratio. With a reverse mortgage, you borrow small amounts – monthly or at other intervals through a line of credit. Payment is required only once, at the end of the loan, typically when you no longer occupy the home as your principal residence.

Benefits

For many older homeowners, a reverse mortgage is an effective way to convert home equity into flexible, tax-free (consult your tax adviser) income. The benefits are numerous:

  • Continue to live in and own the home.
  • Obtain immediate cash advances in addition to monthly income.
  • Receive tax-free income from the cash advances.
  • Adjust your payment option to meet your current circumstances.
  • Enjoy the flexibility of determining how you wish to receive your cash disbursements: fixed monthly payments, a line of credit, a lump sum cash advance, or a combination of the plans.
  • Have peace of mind knowing that you and your heirs have no personal liability for the repayment of the loan since it is secured solely by your home.
  • Repay the loan at any time without penalty.
  • Relax knowing that you owe nothing until after you no longer occupy the home as your principal residence.

Disadvantages

  • Reverse mortgages tend to be more costly than traditional loans because they are rising-debt loans. The interest is added to the priprincipal loan balance each month. So, the total amount of interest owed increases significantly with time as the interest compounds.
  • Reverse Mortgages are typically more costly to set up than other types of loans 
  • Reverse mortgages also use up all or some of the equity in a home. That leaves fewer assets for the homeowner and their heirs.
  • The vagaries of age might make such cash availability dangerous. Families should be prepared to monitor draw downs and/or expenditures if this is a risk
  • Interest on reverse mortgages isn’t deductible on income tax returns until the loan is paid off in part or whole.
  • Because homeowners retain title to their home, they remain responsible for taxes, insurance, fuel, maintenance, and other ho housing expenses.
  • Although the proceeds are tax-free, a Reverse Mortgage may affect your eligibility for certain “need based” public benefits.
Advertisements

5 thoughts on “What The Heck Is A Reverse Mortgage? – Part 1 of Reverse Mortgages

  1. Hey Tony, great article. I’m really looking forward to the rest of your series. I’m always greatly interested to see reverse mortgages from the vantage point of someone with your background. Being that I work in the arena of reverse mortgage, taking a step back and seeing it all from the eyes of someone with an educated and clear view of how they work, and those for whom they are designed, is always refreshing.

    So far, you’ve definitely been very thorough and accurate with what you’ve shared. This is a great foundation for anyone who is looking for an independent and educated voice on the topic.

    Keep up the great work. Looking forward to part 2.

    ~Corey

  2. Cori – Like I said, I am not a reverse mortgage authority like yoursef, however this program is growing every year and deserves attention. Hopefully, I can get this series down and accurate. Thank you for your comments!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s