Reverse mortgages, often misconceived or misunderstood, offer unique financial advantages for homeowners aged 62 and older. While it may seem complicated, understanding the essentials can help you make a more informed decision.
Here’s the top ten things you need to know about reverse mortgages.
1. The Proceeds from Reverse Mortgage Are Free From Tax
Yes, you read that right! The money you receive from a reverse mortgage isn’t considered income. Therefore, it’s not taxable. However, this doesn’t mean it can affect your taxes in other ways – like potentially impacting your eligibility for certain tax deductions. It’s always wise to consult a tax advisor to understand the complete picture.
2. Reverse Mortgage has Many Different Types
Not all reverse mortgages are created equal. The three main types are:
- Home Equity Conversion Mortgages (HECMs): The most common, backed by the U.S. Department of Housing and Urban Development.
- Proprietary Reverse Mortgages: Private loans that can offer larger sums if you have a high-value home.
- Single-Purpose Reverse Mortgages: Offered by certain state and local agencies, these are meant for one specific purpose, like home improvements.
3. There are Many Ways To Receive the Proceeds from the Reverse Mortgage
Flexibility is a strong point with reverse mortgages. You can opt to receive funds as:
- A Lump sum: This arrangement provides an initial draw of up to 60% of the principal limit during the first year, accessible both as a fixed-rate and adjustable-rate loan. If the maximum liabilities surpass the 60% threshold, an extra 10% of the cap becomes accessible.
- Monthly Term Payments: Homeowners receive equal monthly payments for a fixed period of their choosing, such as five or ten years.
- A Line of Credit: Borrowers can access their funds as needed, drawing from the reverse mortgage line of credit. One unique feature is that the available line of credit can grow over time, depending on interest rates and other factors. Or
- Even a Combination of Line of Credit and Monthly Payments: This hybrid approach combines the structured payouts of monthly payments with the flexibility of a line of credit.
4. Selling A Home With A Reverse Mortgage is Possible
It’s a common myth that you can’t sell your home if you have a reverse mortgage. The reality is, you can! However, the proceeds from the sale would first go towards paying off the reverse mortgage balance and the lender will close your loan account, and any leftover amount would be yours to keep.
5. You Own The Title Of Your Home With a Reverse Mortgage
Another myth debunked! With a reverse mortgage, you retain the title and ownership of your home. The lender does not take control. As long as you adhere to the loan requirements such as paying property taxes, homeowner’s insurance, and maintenance – the home remains yours.
6. Reverse Mortgages Offer A Portion Of Your Home Equity
Unlike traditional mortgages that can sometimes allow you to borrow up to the home’s full value, reverse mortgages limit the amount to a portion of your home equity. The Federal Housing Administration (FHA) calculates the maximum mortgage amount based on factors like: the borrower’s age, prevailing interest rates, and the home’s appraised value play into determining the exact amount you can borrow.
7. Most Reverse Mortgages Come With A Government Guarantee
If you opt for a HECM, you’ll be pleased to know that they come with a government-insured program. This means even if your lender defaults or the loan balance exceeds the value of your home, you’ll continue to receive your payments. Furthermore, this guarantee also caps your loan payment requirement to the value of your home, protecting both you and your heirs.
8. After Your Death, Heirs Can Keep The Home By Paying Off The Balance
If the homeowner passes away or decides to move out, the reverse mortgage becomes due. However, heirs have the option to either sell the home to repay the loan or refinance to a conventional mortgage to retain the property. It offers a seamless transition for families who wish to keep the home in their possession.
9. You Can Use the Reverse Mortgage Proceeds for Anything
Whether it’s a long-awaited world tour, medical bills, home renovations, or simply supplementing your retirement income, there are no restrictions on how you spend the money. It’s your equity; use it how you see fit!
10. You Can Refinance Your Existing Mortgage
If you have an existing traditional mortgage, you can use the proceeds from a reverse mortgage to pay it off. By doing this, you eliminate monthly mortgage payments, which can significantly improve your cash flow during retirement.
Conclusion
Reverse mortgages, while not suitable for everyone, can offer a wealth of opportunities for the right homeowner. Like all financial decisions, it’s essential to do thorough research and consult professionals. Equipped with the knowledge from this guide, you’re now one step closer to making an informed choice. And remember, these mortgages are more than just a financial tool; they’re a chance to unlock opportunities, enhance your retirement, and live life on your terms.