Understanding a Reverse Mortgage
Reverse mortgages have gained a tremendous amount of popularity in recent years. However, understanding the basics about reverse mortgage is critical to evaluating whether or not it is the right financial tool for you.
What is a Reverse Mortgage?
A reverse mortgage is a mortgage tool that allows individuals, age 62 and older to convert a portion of the equity in their home into tax free income. One of the primary benefits of a reverse mortgage is that, although it is a loan, you do not have to make any payments back to the lender until the secured property is no longer occupied by the borrowers. That means that until the borrower either moves or dies, there are NO MONTHLY PAYMENTS made. This can be a tremendous opportunity for individuals on a fixed income who are looking for ways to improve their cash flow or even for someone who currently has a mortgage payment and a job, but is looking for a way to retire sooner. With a reverse mortgage, the lender would actually pay off the existing mortgages and replace them with a new reverse mortgage.
Proceeds from a reverse mortgage can be received in several ways, depending on how it is set up. One way is a single lump sum. This can be helpful if you have a large purchase or if you have some home improvements that you want to make; A second way is to have it set up similar to a Home Equity Line Of Credit where you would be able to draw on it as you need the money; A third way is to receive a monthly check, similar to an annuity. In this scenario, the mortgage company actually sends you a check every month rather than you sending them a check in repayment of the loan;
How can I qualify for a loan if I don’t have much income?
Qualification for a reverse mortgage is quite different than for a traditional forward mortgage. Neither current income nor credit is considered for qualifying purposes. The factors that are used are age, appraised value in your home and current interest rate. That makes it much easier for non working individuals to qualify. Generally speaking, the older you are and the more equity you have in your home, the more you will qualify for.
There are three primary types of reverse mortgages that are used. The first and most widely implemented is the Home Equity Conversion Mortgage (HECM). This product is federally insured by the Federal Housing Administration (FHA). Second is the FannieMae Home Keeper. The third type is called a Cash Account “Jumbo” loan. The primary differentiating factor for each is the maximum loan amount. HECM loans are subject to FHA loan size limitations; Home Keeper is subject to FNMA loan size limitations. Maximum loan size will vary based on location of the property. For loan amounts above these limits, the Cash Account “Jumbo” takes over.
How secure is a reverse mortgage?
With the federal government regulation and oversight, education requirements and streamlined systems of implementation, reverse mortgages have gained tremendous support and security. The American Association of Retired People (AARP) has been a significant supporter of reverse mortgages for quite some time and as such has dedicated an entire section of their web site to educating its members about reverse mortgages and their benefits.
How can I use the proceeds?
Proceeds from a reverse mortgage can be used any way that you want. You can use the money as a tax free income supplement, to make some home improvements, make major purchases, such as a car. Another possibility is to take a lump sum and fund an annuity or other secure investment. This can be a wonderful way to enhance your retirement income.
A reverse mortgage can be a wonderful tool to use to help you enter into the “golden years”. Many of the negative stigmas have long since gone away and the products themselves are designed with inherent safeguards to protect the value of home ownership and the American dream.
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