What is a Reverse Mortgage?


Many people are asking "What is a reverse mortgage?". Here is the information on reverse mortgages, how they work and how much they cost.

A reverse mortgage is a tool to enable seniors to convert the equity in their home into a retirement income to supplement their Social Security and other retirement income. Many baby boomers plan to use their home to finance their retirement.

So, really, what is a reverse mortgage? It is a home loan that is available to a homeowner that is 62 years old or older, who has no current mortgage (or a low mortgage), and who lives in the home.

It is a mortgage that pays you instead of you paying the bank. Generally, the greater the value of your home, the older you are, the lower the interest rate, the more you can borrow. The interest you owe accumulates and you go further and further in debt. It is available regardless of current income.

These loans are set up so that you never owe more than your home's value. This is done by only lending up to a maximum of about 65% of its value. The loan is not paid until the borrower(s) have died or no longer live in the home. Usually at that time, the house is sold, the loan is paid off, and the difference goes to the estate.

These loans are mostly FHA/HUD loans that currently have a maximum amount of somewhat less than $400,000, although HUD wants to increase that maximum.

The borrower retains title to the home, so the decision could be changed by getting a new first mortgage and paying off the reverse mortgage for the amount of money received plus interest, if the borrower chooses to do that.

Again, the key qualification is that the borrower(both borrowers in the case of two people) is 62 years old or older and lives in the property.

More reverse mortgage information is available on the internet or from your local lenders. Before entering into a reverse mortgage, it is wise to consult a Certified Financial Planner, Certified Investment Advisor, your Estate Planner and Tax Accountant to be sure it is the right thing for you to do.

For What is a Reverse Mortgage Used?

The loan proceeds can be used for any purpose the borrower chooses, but often is considered a last resort escape route to pay unexpected medical bills.

What is a Reverse Mortgage Advantage?

The reverse mortgage is a financial solution available to help seniors live more independently and financially secure. The money you receive is tax free because it is already your money. No payment on the reverse mortgage is required until the borrower(s) no longer lives in the home.

You can never lose your home because of a reverse mortgage as the maximum mortgage is about 65% of the value of the home. If the value of the home does become less than the value of the reverse mortgage, the mortgage insurance that is paid to HUD makes up the difference.

What is a Reverse Mortgage Disadvantage?

The reverse mortgage is the most expensive loan available, not only to obtain, but also to maintain. Often monthly service fees are added to the amount of the loan. There generally are high up front costs to obtain a reverse mortgage. The interest paid is tax deductible, but not until the loan is paid off. HUD insists that borrowers have a counseling session with an approved housing counselor prior to entering into a reverse mortgage.

What is a Reverse Mortgage Alternative?

You could sell your home and take the capital gains exclusion available on your personal residence. But you will still need a place to live. For joint filers that would be $500,000 ($250,000 for individuals) tax free as long as you lived in the property for 2 out of the last 5 years. You can repeat this process every 2 years.

Disclaimer

The information provided on this website is for informative purposes only. It is recommended that you seek advice for your specific situation from a Certified Investment Advisor or Certified Financial Planner. It would also be advisable to seek advice from your Estate Planner and Tax Accountant.


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