Your Question: What Is A Reverse Mortgage?
Professor Tate answers:
If you are a homeowner of 62 year of age or older who owns your home outright (or with a relatively low mortgage balance), you may qualify for a Reverse Mortgage.
What is a Reverse Mortgage? It is a loan that is available to eligible homeowners to allow them to convert part of the equity in their home into cash. It’s called a Reverse Mortgage because instead of the borrower making payments to the lender, the lender is making payments to the borrower.
The Reverse Mortgage loan was created as a means to help retirees with limited income to use the accumulated wealth in their homes to help pay for their living expenses and healthcare.
The borrower can receive the money as a lump sum, a line of credit or monthly payments. As long as you continue to live in your home, you are not required to make any monthly loan payments. Of course, you would still have to remain current on your homeowner’s insurance, property taxes, and if applicable, your homeowners association dues.
How much money can you get? Well, that depends. Your home’s value and your age, among other factors, will determine the amount you can borrow with a Reverse Mortgage Loan. All else being equal, the older you are, the more money you can get. For a general idea of what you may be able to qualify for and what fees may be, visit http://www.reversemortgage.org/About/Reverse-Mortgage-Calculator
The nice thing about a reverse mortgage is that it lets you access your equity and will allow you to live in your own home for the rest of your life. Another upside to a reverse mortgage is that the proceeds from it aren’t subject to income tax or capital gains tax, so your Social Security or Medicare benefits typically will not be affected.
You should be aware, though, that there are upfront costs that you’ll need to pay. These costs may be paid with proceeds from the loan, but funds you withdraw from the loan are also charged a relatively high interest rate. And, if you end up vacating your home down the road, your equity will be significantly reduced.
Reverse Mortgages are typically repaid through the sale of the property after the borrower dies. Therefore, heirs would not be able to inherit the home. All proceeds beyond the amount owed can be transferred to heirs, with no debt being passed along. Remember though, that by this time, there may be little to no equity left to be transferred.
A Reverse Mortgage might be a good option for you if you’re a retiree with a limited income. But you'll want to weigh out the decision carefully and consider speaking with a financial planner before signing any reverse mortgage documents.
You asked, now you know!
-Professor Reel S. Tate