A house you haven't fully paid for can be a liability, but what if you…
A reverse mortgage is a financial tool for individuals who own their own homes and are age 62 or older, who would like to get money out of their house to supplement their retirement. It allows the use of the equity in the home to be turned into a monthly income, payable to the homeowner. Although this can be a very helpful process for a retired person or couple, careful deliberation is important. This process may not be for everyone.
The best way to describe how a reverse mortgage works is to compare it to a regular mortgage. In a regular mortgage, the homeowner makes a monthly payment to a mortgage company, which allows for the purchase of the home over a period of time. In a reverse mortgage, this process is reversed, meaning that payments are made from the equity of the home to the homeowner.
Payments received from a reverse mortgage are usually tax-free. As long as the homeowners remain in the home, the money received does not have to be paid back. When they die, move out, or sell the home, the loan is repaid. In many cases, repayment of the loan requires the sale of the home.
The homeowners will be allowed to live in the home as long as the taxes on the home are paid and homeowner’s insurance is kept up on the home. In some loan setups, if only one spouse signed the loan and that person dies, the remaining partner may continue to live there until he or she dies. In most cases, the older a homeowner is, the more equity will be in the home. This means there should be more money available as income.
Anyone who is applying for a reverse mortgage must meet with a counselor if the loan is a HECM loan (Home Equity Conversion Mortgage). During this session, the counselor is required to explain the costs that will be incurred by the homeowner and the different options available. These counselors work under the direction of HUD (United States Department of Housing and Urban Development) and will most likely charge a fee, which can come out of the loan proceeds. A potential prospect cannot be turned away if the homeowner cannot afford the fee.
There are usually no income requirements, but the lender has to conduct an assessment of the homeowner’s finances before the loan can be approved. The homeowner must be deemed responsible and willing to meet their obligations, such as paying the required property taxes and maintaining the homeowner’s insurance requirement.
Ultimately, a reverse mortgage can be highly beneficial for certain individuals. Since there are no monthly payments to make, an increase in income can go a long way during tough economic times. However, it’s a matter that should be discussed with one’s family before any commitments are made. It is possible to use up the equity in the home to the point where there’s nothing to pass on to one’s heirs.