What You Need to Know About Reverse Mortgages
Senior celebrities such as Robert Wagner and James Garner have been pitching reverse mortgages in television advertisements. The message seems appealing to many seniors who are house rich but cash poor: Use your home equity to provide yourself a source of reliable, tax-free retirement cash flow, and you get to continue to live in your home as long as you want.
So, as reverse mortgages become more popular, it is becoming more likely that one of your clients will ask you a question about whether they make sense.
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A reverse mortgage is a loan secured by home equity that, instead of requiring payments from the homeowner, makes payments to the homeowner. The closing costs, rather than having to be paid in cash, are accrued as part of the loan. The closing costs and payments to the homeowner accrue with interest and do not become payable until the homeowner dies, permanently moves out, or sells his or her home. As such, a reverse mortgage loan can be an important source of cash for a cash-strapped homeowner.
90% of reverse mortgages are insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development (HUD), and operate under the rules mentioned in this article. The requirements to take out a reverse mortgage are that:
Each homeowner needs to be age 62 or older
The homeowner needs to either own the home outright or have a small enough existing mortgage that the reverse mortgage can be used to pay off the existing mortgage.
The home must be the homeowner's primary residence.
The home must be in good enough condition to pass a mandatory inspection.
When a homeowner qualifies for a reverse mortgage, he or she can receive money in the form of a lump sum, access to a line of credit, a monthly payment that can continue as long as the homeowner remains in the home, or some combination of these. The form of payment can even be altered over time.
The homeowner retains title to the home and control of the home. There is no risk of foreclosure as long as the homeowner makes his or her property tax and homeowners insurance payments. The loan does not become payable until the last homeowner dies, permanently moves out, or sells his or her home. At that time, if the value of the home exceeds the loan balance, the homeowner's heirs ultimately receive the value of that equity. If the loan balance exceeds the home value, federal insurance covers the loss for the lender.
All of the money that the homeowner receives from the reverse mortgage is completely tax-free and does not alter eligibility for Social Security retirement benefits or Medicare health insurance benefits, although eligibility for other government assistance can be affected.
For more information, check out the websites of the U.S. Department of Housing and Urban Development, Fannie Mae, or the National Reverse Mortgage Lenders Association.