The reverse mortgage has become one of the more popular retirement planning tools in recent years. Reverse mortgages are sought after because they can provide an income source for retirees who have built up a great deal of equity in their homes. However, before you decide to take the plunge with a reverse mortgage, you should carefully consider your options. Here are 8 things you need to know about reverse mortgages that retirees should consider:
A reverse mortgage is a loan:
Realize that a reverse mortgage is a loan. It is a loan based on the equity of your home. In order to take advantage of the FHA’s reverse mortgage program, you need to have your home paid off, or be able to pay off the balance at closing with money from the reverse mortgage. Other lenders have different requirements regarding how much you have left on your mortgage. Ultimately, though, you would do well to remember that a reverse mortgage comes with closing costs, interest, origination fees and any other charge found with any home equity loan.
You can take your money any way you like:
You can receive your reverse mortgage payments as a lump sum, as a regular installment, or by using a debit card to access the balance. However, the amount available to you depends on how much equity you have, how old you are, and the interest and fees on the loan. Generally, the older you are, and the higher value your home has, the more you can borrow for your reverse mortgage.
You must be at least 62 to qualify for the FHA reverse mortgage.
There are lenders out there who will qualify you for their own reverse mortgage product if you are at least 60. However, the FHA will not qualify you unless you are 62. It might be a good idea to consider the FHA program, since you know that is reputable.
Income is not a requirement:
Unlike a more traditional home equity loan or a refinance loan, there is no income check on a reverse mortgage. Your approval hinges entirely on your home and age. You do not make payments on the reverse mortgage as long as you are living in the home, so foreclosure is not an issue. You are still responsible for taxes, insurance, utilities and maintenance, however. (Many retirees use money from the reverse mortgage to make these payments.)
Reverse mortgage payments are not taxed:
Since a reverse mortgage is a loan, you do not have to pay income taxes on the money you receive from the loan, even if it is for payments. If you have been looking forward to retirement, you may receive a shock when you realize income lost from retiring keeps you from living comfortably. Your first thought may be to take out a standard mortgage on your home, but a reverse mortgage is a better option because it will not give you a monthly bill to pay. In fact, a reverse mortgage lender will pay you part of your home equity in spendable cash each month until you receive as much as you can borrow. For as long as you retain home ownership and live in the home you can use that money to pay any retirement expenses you want without receiving a monthly mortgage bill. When you leave the home you can choose between allowing its sale or paying the balance
You cannot owe more than your home is worth with the FHA loan:
One of the reasons it is so important to consider the FHA reverse mortgage is that you cannot owe more than your home is worth at the time you or your heirs sell the home. This means that if your home falls in value, it is the lender that has assumed the risk, and the lender cannot take more than the market value of the home. Be careful, though! Some of the less scrupulous lenders might have different rules. Make sure you go through a lender that is FHA-approved.
You must be living in your home:
In order to qualify for a reverse mortgage, you must be living in the home, using it as a primary residence. If you want to get a reverse mortgage on a home with up to four units, you can, as long as you are living in one of the units. Once you are no longer living in the home as your primary residence (when you move into long-term care, or die), it is time for the loan to enter into repayment.
Your estate repays the loan upon your death:
If you are concerned about leaving your home to your heirs, a reverse mortgage is probably not for you. When you die, the reverse mortgage lender has first claim on your home. Either your heirs have to pay off the lender with other money from your estate, or the home has to be sold in order to pay off the loan. If you move into long-term care, and you or a co-borrower no longer occupy the home, it is time to sell the home, or to begin making payments.
Before you decide on a reverse mortgage, it is a good idea to check information from the FHA, and consult with a knowledgeable financial planner. The FHA has a list of approved lenders and counselors that can help you through the process.