What is a Reverse Mortgage? Who Are They Right For?

What is a Reverse Mortgage? Who Are They Right For? (Source: pexels.com - used as royalty free image)

For older Americans looking to take a new approach to their budget and income in retirement, there’s a program that could help you capitalize on your home’s equity – if you meet the numerous qualifications, and if you’re ready to do some research to make sure that it works for your lifestyle and finances.

We’re referring to a “reverse mortgage,” the common name for a Home Equity Conversion Mortgage, or HECM. The FTC offers a helpful way to think about reverse mortgages in a nutshell, noting on their site that, with a standard mortgage, the homeowner is responsible for paying the lender every month in order to buy their home over time; with a so-called reverse mortgage, you’re using a loan in which the lender actually pays you, as a sort of advance payment on your home equity.

With a reverse mortgage, you keep the title on your home, and take out a loan borrowed against the equity in your property. Generally, you’ll get these advances on the equity in monthly installments, which are usually non-taxable, according to the FTC. You’ll still be on the hook for paying real estate taxes, utilities, and insurance premiums for the home, and it’s important to remember that the loan, including cash, interest, and any other fees, will need to be paid in full when the borrower passes away, sells the home, or ceases to use it as a primary residence; any earned proceeds beyond the amount owed can go to a spouse or an estate, meaning that a non-borrowing spouse may be able to remain in the home in certain cases, and any remaining equity can be transferred to heirs, according to the Department of Housing and Urban Development (HUD).

As you may have surmised by now, reverse mortgages are reserved for older Americans; the Federal Housing Administration’s HECM program requires candidates to be 62 years of age or older. Other stipulations? Per HUD, in order to qualify for a reverse mortgage you must:

“own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan.”

The amount that a homeowner will be able to borrow will depend on a number of factors, including their age, the current interest rate, and the value of their home, as determined by appraised value, sale price, or the FHA’s mortgage limit.

It’s easy to see the appeal of a reverse mortgage: The monthly payments or line of credit could easily be used to supplement social security benefits or help pay for healthcare expenses. With that said, it’s important to not go into a reverse mortgage flying blind; they can be quite complicated, and certainly can come with drawbacks.

The FTC, for instance, warns against prying salespeople pitching private reverse mortgages; according to the FTC, certain lenders “might suggest ways to invest the money from your reverse mortgage – even pressuring you to buy other financial products, like an annuity or long-term care insurance,” meaning that “you could lose the money you get from your reverse mortgage.”

Due to the nature of the reverse mortgage, it’s also important to remember that you could well be drawing down all of your home’s equity, making it harder to pass along the property to an heir or earn anything from a sale. And, according to U.S. News and World Report, the fees associated with a reverse mortgage can quickly become quite hefty.

Still, when buying a home or considering your financial future, it’s important to consider every option at your disposal. To talk strategy or seek out a qualified mortgage lender or expert in the Chicagoland area, don’t hesitate to reach out to Real Group! We’d be happy to set you on the right track.

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