(by Jim Carley, Reverse Mortgage Consultant)
Even if you’re already familiar with reverse mortgages, you may have questions or concerns about the process and the options. The information below is designed to give you a brief overview.
Definition A reverse mortgage allows older adults access to the equity in their home to pay for home care needs and living expenses while allowing them to live in their home and maintain their independence.
Eligibility Homeowners age 62 or older who live in the home as their principal residence are eligible. If there is a conventional mortgage, the property owner may still be eligible. In that case, the reverse mortgage would be used first to pay off the existing mortgage(s).
Maintaining ownership Borrowers always retain ownership of their home. They can continue to live in it as long as they want, and the loan doesn’t have to be repaid until they leave or sell the home. They are responsible for paying property taxes and homeowner’s insurance, and making any property repairs.
Loan amount The amount of the loan depends on: homeowner’s age, type of reverse mortgage, current interest rates, Federal Housing Administration’s FHA) lending limits for the area, appraised value of the home, and amount of equity in the home.
Receiving the money Borrowers can receive the cash from a reverse mortgage in a lump sum, a monthly cash advance, a line of credit, or a combination of these options.
Use of the money Usually seniors get a reverse mortgage to allow them to continue living in their home and to remain independent. Reverse mortgages can help pay necessary home care, medical care, or other living expenses.
Monthly payments There are no required monthly mortgage payments. Unlike traditional forward mortgages, with a reverse mortgage, the bank pays the borrower. That’s why it’s called a Reverse Mortgage. The homeowner is still responsible for paying home insurance premiums and property taxes, as well as ongoing maintenance
Repaying the loan Loan repayment is due when the last surviving spouse passes away or leaves the home permanently. The loan can be repaid through sale of the house, or the home can be refinanced with a conventional loan.
Lender limitations Reverse mortgages are non-recourse loans, which means that the property alone is security for repayment of the loan. If the sales price is less than the loan balance, the lender must accept the sale proceeds as sufficient payment and cannot seek to recover additional repayment from the borrowers’ income, other assets, or heirs. Of course, if the sale price exceeds the loan balance, the amount in excess of the loan belongs to the borrowers or their heirs.
Tax implications The money from a reverse mortgage is generally tax-free. Laws differ in each state, so it’s a good idea to consult with a tax advisor.
Government benefits Funds from a reverse mortgage generally do not affect regular Social Security or Medicare benefits. However, needs-based benefits, such as Medicaid and Supplemental Security Income (SSI), could be impacted. Contact a tax professional about your relative’s particular situation.
Interest rates Most reverse mortgages have variable rates tied to a financial index and will vary according to market conditions. MetLife offers both fixed-rate and variable loans.
Refinancing Reverse mortgages can be refinanced. This option can be advantageous if the home increases in value, making more equity available.
Other fees Beyond interest charges, most reverse mortgages have an origination fee, closing costs, a mortgage insurance premium, and a monthly servicing fee. These fees can be included in the loan amount. The costs are added to the principal and paid with interest when the loan becomes due.
Benefits versus a home equity loan Unlike a home equity loan, a reverse mortgage does not require monthly mortgage payments. It also can never be stopped or frozen by the lender. And the borrower can never be foreclosed on as long as they pay their property tax and insurance.
For further questions, contact Jim Carley, Reverse Mortgage Consultant at 925-407-5727