A reverse mortgage is a loan that allows you to turn the equity in your home into cash. As long as you are living in your home, the funds are tax free, and you don’t have to make principal or interest payments. To be eligible for a reverse mortgage, you must be 62 years old or older, have equity in your property, and own a single family residence, townhouse, FHA-approved condominium, manufactured home (click for requirements), or up to a four-unit property as a primary residence.
In order to determine whether or not a reverse mortgage is a good idea for your specific situation, it is important to understand the benefits of reverse mortgages, learn everything that you can pertaining to the truth about reverse mortgages, and compare the best options.
No loan repayment is required while you are living in the home.
As long as you keep your home as your primary residence, you do not have to make monthly payments. The interest that you pay each month is deferred. When you sell the home, no longer occupy it as a primary residence, or pass away, the interest must be repaid. As a reverse mortgage comes with ample flexibility for the funds, you can pay some or all of the reverse mortgage balance at any time without penalties or negative consequences.
You retain complete ownership of your home.
A reverse mortgage allows you to keep your name on the title of your home. You have full control over the home, which means maintaining home ownership responsibilities. For example, you must still take care of general home maintenance and any necessary repairs. You must also pay property taxes and homeowners insurance. You are able to sell your home at any time and will receive 100 percent of the remaining equity after you repay the loan.
The reverse mortgage funds are tax free.
As long as you are living in your home, the funds that you receive with a reverse mortgage are tax free because they are loan proceeds as opposed to earned income. If you have any questions about the tax free status, consult with your tax adviser or a reverse mortgage specialist.
Government insured reverse mortgages are safe and secure.
Currently the Home Equity Conversion Mortgage or HECM is the most popular reverse mortgage product. Private lenders issue the mortgages, and the Federal Housing Administration (FHA) insures them. The Federal Housing Administration or FHA is part of the Department of Housing and Urban Development (HUD) Office of Housing. Due to the lack of a monthly mortgage payment, you are at a reduced risk of foreclosure as compared to a conventional mortgage.
If you take a line of credit on a reverse mortgage, there is also no risk of having the available line of credit withdrawn. In comparison, typically for a home equity line of credit, a bank can choose to decrease the funds available in a line of credit at any time, which means that you may not have access to it when you really need it.
You have flexibility with the plan for receiving your available funds.
Just as there are fixed and adjustable rates for traditional mortgages, there are fixed and adjustable rates for reverse mortgages. Currently for a fixed rate reverse mortgage, you must take a lump sum at closing. With an adjustable rate reverse mortgage, you have the following options for receiving your available funds:
- A partial lump sum cash payment
- A line of credit for a specified dollar amount. A line of credit is the most popular option because it allows you to access the money as you need it. The amount of money available in the line of credit is intended to increase over time. Ask a reverse mortgage specialist for more information about this option to learn how it can be beneficial.
- A monthly cash advance for a specified period of time or an amount guaranteed for as long as you occupy your home as a primary residence
- A combination of the preceding options. For example, if you have enough loan proceeds, you can take $20,000 at closing, $40,000 on a line of credit, and $2,000 per month for a given number of months.
With an adjustable rate reverse mortgage, you may have the option to change the payment method to reflect a change in your needs. Keep in mind that until you receive the funds, the interest does not accrue. If you decided to take an adjustable rate reverse mortgage with monthly payments or a line of credit, you can substantially decrease the amount of interest that builds over an extended period of time.