As an older American, you can use "reverse" mortgages to get money to pay off your current mortgage, make major home improvements, supplement your retirement income, or pay for unexpected health care costs. With these kinds of loans, you can turn some of the equity in your homes into cash without having to sell them, move, or take on more monthly debt.
In a "regular" mortgage, you pay the lender every month. With a "reverse" mortgage, on the other hand, you, the homeowner, get money FROM the lender, and you usually don't have to pay it back as long as you live in your home. Instead, you pay back the loan when you die, sell your home, or stop living in it as your main home. Reverse mortgages are great for people who own homes that are worth a lot but don't have a lot of cash on hand or a steady income. It lets you stay in your home and pay your bills at the same time. Most of the time, the extra money you get from these types of mortgages can improve the quality of your life.
Most reverse mortgages require that you be at least 62 years old and live in your home. Most of the time, the money from a reverse mortgage doesn't have to be taxed, but you should check with your accountant or CPA just to be sure. Also, a typical reverse mortgage has no restrictions on how much money the borrower makes.
There are three main kinds of reverse mortgages:
- Some state and local government agencies, as well as some non-profits, offer reverse mortgages for a single purpose.
- The U.S. Department of Housing and Urban Development (HUD) backs Home Equity Conversion Mortgages (HECMs), which are reverse mortgages insured by the federal government.
- Reverse mortgages that are owned by a company. These are private loans that are backed by the company that made them.
Most of the time, the costs of a single-purpose reverse mortgage are very low. But there aren't many of them, and they can only be used for one thing, which is set by the government or nonprofit that gives the loan. Paying for home repairs, home improvements, or property taxes is one example. Most of the time, you need to be in the low-to-moderate income range to qualify for these loans.
Reverse mortgages and HECMs tend to be more expensive than other types of home loans. The costs at the start can sometimes be very high. Most of the time, they cost the most if you only live in your home for a short time, like less than three years. But they are easy to get and don't have any income or health requirements. They can also be used for anything you want.
Before you can apply for a HECM, you have to meet with a counsellor from a private agency that the government has approved. The counsellor has to tell the client how much the loan will cost, what it will mean for their finances, and what other options they have. As an example, counsellors are supposed to tell you about other government or non-profit programmes for which you may be eligible. The counsellors must also tell you about any "proprietary" or "single-use" reverse mortgages that are available in your area. With a HECM, or proprietary reverse mortgage, you can borrow money, but how much you can borrow depends on a number of things. These things:
- Your age
- What kind of reverse mortgage you choose
- Your home's current appraised value
- The interest rates now
- The address of your home.
In general:
- As you get older and
- The more your home is worth and
- The less you owe, the better.
- You can actually get more money.
With a HECM mortgage, you can choose how to get the money from the loan. These things:
- The option to choose a fixed monthly cash advance for a certain amount of time or for as long as you live in your home.
- The option to get both a line of credit and monthly payments.
- Most of the time, HECMs give out bigger loan amounts at lower total costs than proprietary reverse mortgage loans.
- The option of a line of credit, which lets you use the loan money whenever you want and in any amount you choose.
But people whose homes are worth more may be able to get a bigger loan advance from a proprietary reverse mortgage. This is only true if your home's value has gone up and your mortgage balance has gone down. If so, you may be able to get more money through a proprietary reverse mortgage.
NOTE The location of your neighbourhood is only one part of what goes into figuring out how much your home is worth.
Loan Feature's
Advances on a reverse mortgage loan are not taxed and usually won't change your Social Security or Medicare benefits. You still own your house, and you don't have to make any payments each month. The loan has to be paid back when the last remaining borrower dies, sells the house, or stops using the house as their main home. In the HECM programme, a borrower can spend up to 12 months in a nursing home or other medical facility before the loan is due. This keeps you from losing your home if you need to stay in the hospital for a long time.
If you want a federally insured HECM, you should know that ALL HECM lenders must follow the rules and guidelines set by HUD. No matter which lender you choose, some of the loan costs, like the interest rate, will be the same. These costs include:
- The fee to start the loan
- The cost of closing and
Service fees will be different for each lender.
If your home is worth more, you can probably borrow more with a proprietary reverse mortgage than with a HECM. Even though it usually costs more to borrow money. The best way to see the main differences between a HECM loan and a proprietary loan is to compare their future costs and benefits side by side. This very important information is easy to get from most HECM counsellors and lenders.
No matter what kind of reverse mortgage you are thinking about, make sure you know all the ways the loan could become due and payable. Ask your counsellor or lender to explain the rates for the Total Annual Loan Cost (TALC). These tell you how much a reverse mortgage is expected to cost on average each year and break down all the costs.
