A reverse mortgage is a type of home loan that allows homeowners aged 62 or older to access some of the equity in their home. With a reverse mortgage, the lender makes payments to the borrower, and the borrower does not need to repay the loan until they move out, sell the home, or pass away. Reverse mortgages can provide seniors with extra income in retirement or help them pay for healthcare and other expenses.
Reverse Mortgage Basics
There are a few key things to understand about how reverse mortgages work:
- You must be 62 or older to qualify. All borrowers on the loan must meet the age requirement.
- The amount you can borrow depends on your age, the value of your home, and interest rates. Generally you can access up to 60% of your home’s value.
- You receive funds from the lender as a lump sum, line of credit, monthly payments, or a combination. You do not need to repay the loan as long as you live in the home.
- When the loan comes due, you or your heirs can either sell the home and pay off the loan balance, or pay off the loan by obtaining a new mortgage. If the sale proceeds are less than what you owe, you or your heirs are not responsible for the difference.
- The lender places a lien on your home, but you retain ownership and can leave the home to heirs.
Reverse mortgages allow seniors to tap into their home equity while still living in the home long-term. Because repayment is not required until the borrowers move or sell the home, reverse mortgages are considered a safe way for older homeowners to supplement retirement income.
Understanding Reverse Mortgages
Reverse mortgages have some distinct advantages as well as disadvantages to understand before applying for one:
Pros
- You can access a portion of your home equity as tax-free funds. This money can be used for any purpose.
- No repayment is required as long as you maintain the home. This provides financial flexibility.
- You retain ownership of the home. Heirs can inherit the home by paying off the reverse mortgage.
Cons
- Closing costs and interest can be higher than forward mortgages. This reduces the net funds you receive.
- Your home equity will be reduced over time as the loan balance grows. Less equity will be available to heirs.
- If home values decline, your loan balance may exceed the home value, reducing what heirs would inherit.
- Your access to funds is limited to what the lender approves based on your age, value of home, and interest rates.
Reverse mortgages involve complex financial trade-offs between accessing home equity now versus preserving equity for the future. Getting impartial financial advice can help determine if a reverse mortgage aligns with your overall financial goals.
FAQs:
What is a reverse mortgage and how does it work?
A reverse mortgage is a home equity loan product that allows seniors aged 62+ to access funds against the value of their home. You can receive funds as a lump sum, line of credit, monthly payments or a combination. No repayment is required until you sell the home or pass away. The loan accrues interest over time and is repaid when the home is sold. Heirs can keep the home by paying off the reverse mortgage balance.
What are the basic requirements for a reverse mortgage?
The main requirements are that you must be 62 or older, own your home outright or have a low mortgage balance, occupy the home as your primary residence, and maintain the home. Your home must meet the lender’s value requirements, which depend on location but generally between $100,000 to $726,525. Reverse mortgages are non-recourse loans, so heirs are not liable for any shortfall if the home sells for less than the loan balance.
Can I leave my house to heirs with a reverse mortgage?
Yes, you can name heirs to inherit your home with a reverse mortgage. When you pass away, heirs have a few options. They can pay off the reverse mortgage balance and keep the home. They can sell the home and use the proceeds to repay the loan. Or they can sign over the home to the lender in exchange for being released from the mortgage. Even if the sale proceeds don’t cover the full loan balance, heirs are not responsible for the difference.
How does a reverse mortgage affect my other debts?
Reverse mortgages do not directly impact other debts you may have. The funds you receive from a reverse mortgage are tax-free and can be used to pay down debts if you choose. A reverse mortgage does not require monthly repayments, so it will not affect your ongoing cash flow for other debt payments. However, the reverse mortgage balance will reduce the equity heirs inherit, which could limit what they receive to pay off your other debts. It’s important to discuss your total financial situation with an advisor.