But Be Cautious of the Risks
For seniors 62 and over, a Reverse Mortgage is one way to age-in-place and stay independent. And while the advertisements sound great, seniors need to know the facts. Read on to learn about the pros and cons of a reverse mortgage.
Types of Reverse Mortgages
A reverse mortgage allows a homeowner 62 years or older to withdraw part of their home equity for expenses without repayment. These include buying a new home, normal living expenses, and long term care costs, as examples.
There are several types of reverse mortgages. The most commonly used is the Home Equity Conversion Mortgage (HECM). In the United States, the Federal Housing Authority (FHA) oversees the HECM Program.
Another type, the proprietary reverse mortgage, is offered by private lenders. The FHA does not insure this type. This type is also known as a jumbo reverse mortgage because it is not subject to loan limits.
Finally, low-income older adults may qualify for the single-purpose reverse mortgage or deferred payment loan. This type covers specific purposes only. The government sponsors this type of mortgage.
Home Equity Conversion Mortgage (HECM) Program
The FHA insures reverse mortgages through the HECM program. To qualify for the HECM program, a senior must be 62 or over, live in the home, and have large equity or the home paid off. Unlike a traditional mortgage which is repaid, the HECM allows seniors to use part of the equity for expenses without repayment. Accrued interest and the loan balance are repaid at death or when the house is sold. The FHA insures the mortgage and will pay the loan balance if the sale of the home is not enough. The loan is not paid during the life of the borrower. However, the borrower pays insurance, closing costs and fees, property taxes, and home maintenance.
- Live in the home while alive
- Property of 2 to 4 units is eligible, provided one is owner-occupied
- Proceeds in form of lump sum, interval payments, line of credit, or combination
- Counseling to Ensure Qualifications are Met and Understand Risks
- Specific Personal, Property, and Financial Qualifications
- Charitable Contribution may be affected if balance is due upon death
- Expenses-insurance, property tax, maintenance
- Reverse Mortgage Scams
- Loan to value amount is greatly reduced
The decision to use a reverse mortgage is complicated. Besides the strict qualifications, seniors 62 and over need to know the loan is greatly undervalued compared to the equity in your home. Also, there are many scams targeting seniors. If you are considering this type of mortgage, begin by speaking with an HECM counselor at 800-569-4276. Use caution and speak with others before signing a contract. Speak with your estate planner to make sure your HECM will provide you with enough money through your retirement.
For more tips on real estate, aging-in-place, and not outliving your money, request a copy of our free book, The Northwest Indiana Guide for Seniors.
Disclaimer: The information is for education purposes only. Please consult a professional for mortgage advice.