Introduced in 1989, reverse mortgages were designed for homeowners nearing retirement age. The premise behind a reverse mortgage is to allow those aged 62 or older, with at least 50% equity in their home, to tap that equity in the form of a payment that will be made to them monthly. The complete opposite of a standard mortgage, reverse mortgages use the home’s equity to pay borrowers a set amount each month, with owners no longer required to pay their current monthly mortgage, if they have one. Income from a reverse mortgage is typically tax-free, and payments will continue as long as the borrower remains in the home, or the home’s equity is used. Borrowers are not required to pay the money back as long as they remain in the home, but the loan becomes due and payable if the borrower moves or sells the home. If the borrower dies, the money is typically paid back by the estate through the sale of the home.
Though the premise is simple, the reverse mortgage process can be complicated, which is why those interested need to work with an experienced professional that understands the industry and the process.
There are currently three different types of reverse mortgages; the Single Purpose Reverse Mortgage, with is the least expensive of the three options, and are typically offered by state and local government agencies. Proprietary Reverse Mortgages are typically private loans that are guaranteed by the companies that offer them, and are best suited for those with higher-value homes. Finally, the Home Equity Conversion Mortgage (HECM) are reverse mortgages that are backed by U.S. Department of Housing and Urban Development (HUD) and can be used for any purpose. HECMs are the most popular reverse mortgage, and offer both variable and fixed rate loans.
If you’re considering a reverse mortgage, be sure to keep these things in mind before making a commitment:
- There can be significant fees involved when obtaining a reverse mortgage, including loan origination fees and closing costs. Servicing fees and mortgage insurance are also a possibility.
- Interest rates are variable on most reverse mortgages, and interest is not tax deductible until the entire loan is paid, though HECMs do offer a fixed rate loan.
- Borrowers are required to maintain the home as normal, including keeping homeowners insurance and property taxes current.
- Unlike a standard mortgage, more is owed on a reverse mortgage as the months go by, with interest accruing each month, which is added to the final repayment amount.
- Remember that the loan is due when you no longer live in the home, or upon your death. If family members want to retain the home, they will need to pay the reverse mortgage company the entire amount that was borrowed including interest and any mortgage insurance premiums, otherwise the home reverts to the lender.
While reverse mortgages can provide those with limited retirement funds a way to bolster their income, it’s important that anyone considering a reverse mortgage obtain additional information on the pros and cons from a reputable lender.
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