Reverse mortgages have become more and more popular recently. This is due primarily to the fact that the U.S. population is aging. A reverse mortgage is a loan for homeowners who are 62 years or older. With a reverse mortgage a senior is able to get access to the home’s equity without having to make monthly loan payments or sell the home. This can be quite advantageous as many senior citizens are on fixed incomes and may need extra cash to pay for medical bills or other living expenses.
With a reverse mortgage there are no monthly payments and the borrower is not required to pay the loan back until the homeowner moves, sells the house or dies. When one of those three events occur, the home is put up for sale and the proceeds are used to pay off the reverse mortgage. If there is any money left over it goes to either the homeowner or the homeowner’s estate. Reverse mortgage loans are insured by the federal government. If the sales proceeds are not sufficient to pay off the reverse mortgage, the government is responsible for making up the difference.
There are eligibility requires that need to be met in order for a borrower to qualify for a reverse mortgage. The borrower must be 62 years or older and must either have a low balance remaining on the mortgage or own the home outright. The Department of Housing and Urban Development (HUD) determines the dollar amount that is received for the reverse mortgage. This amount is derived from a formula that factors in the house’s appraised value, the borrower’s age, location of the property, interest rate, and type of payment that will be disbursed. The reverse mortgage can be issued as a line of credit, in monthly installments, in a lump sum, or some combination of the three. Borrowers must also attend counseling sessions that are approved by HUD to ensure that the borrower understands what a reverse mortgage entails before signing a contract.
There are advantages as well as disadvantages to reverse mortgages. One big advantage of reverse mortgages is that the homeowner gets access to the equity that is built up in the home without having to make monthly payments or sell the house. The money from the reverse mortgage can be used for living expenses, to pay medical bills, or for other financial needs of the borrower. The distributions are also tax exempt and the income does not affect Social Security and Medicare benefits.
The major disadvantage of reverse mortgages is that the borrower is losing equity in their home and accumulating debt instead. Another disadvantage is there are high fees associated with a reverse mortgage, including an initiation fee, appraisal fee, an inspection and credit report which can end up costing the borrower thousands of dollars.