What is a Reverse Mortgage?
A reverse mortgage loan allows the homeowner to get cash out of a portion of the equity in their home without having to make monthly mortgage payments or leave the property.
Remember: ‘equity’ is what you own outright. This is different than a home equity line of credit -- which is complicated and a bit scary.
A reverse mortgage can increase your income during retirement. Some retirees delay their Social Security by using a reverse mortgage to provide an income stream. Some pay for medical bills or long-term care expenses.
Reverse mortgage loan borrowers must go through a quick financial calculation to make sure they can cover their property taxes, homeowner’s insurance and other home ownership obligations.
The loan comes due when the homeowner passes away, leaves the home permanently, sells the home or is otherwise unable to meet their loan obligations.
I. The government-insured Home Equity Conversion Mortgage, which makes up almost all reverse mortgage loans, have a unique non-recourse feature. This means that if the loan amount due exceeds the value of the home at that time, the homeowner is not responsible for paying the difference. This can be a huge plus for both homeowners and their heirs. The amount of money available in a reverse mortgage depends on the current interest rate, age of the youngest borrower, value of the property and how much equity has accrued.
II. Reverse mortgages have been around for more than three decades but initially weren’t a popular option because the rules governing the loans allowed lenders to share in the increasing value of the property over the life of the loan, which reduced the benefit to the homeowner.
III. Eligible non-borrowing spouses (the spouse of the homeowner who got the reverse mortgage) can remain in the home after the borrower of a reverse mortgage loan passes away--- just as long as the spouse also meets the conditions of the loan.
IV. Remember, an heir or the executor of the estate can choose to sell the home and use the proceeds to repay the loan. Any remaining proceeds from the sale can be split among the heirs. The heirs also have the option to repay or refinance the loan and keep the home in the family.
V. In a reverse mortgage, the homeowner retains the title to the home—which is good.
There are many misconceptions around reverse mortgages - -none of these are true:
• Reverse Mortgages are complicated
• The bank becomes the owner of the home
• The property can’t be left to heirs after homeowner death
• The homeowner can’t sell the property and that refinancing the loan isn’t possible.
• Educate yourself and talk to your spouse
• Take care of the property