What is a Reverse Mortgage?

There’s an interest uptick in reverse mortgages, notably from older adults on fixed incomes coping with inflation. They can be a good option – but also a bad one.

TUCSON, Ariz. – If you watch any television, you’ve likely seen well-known voices, like actor Tom Selleck, touting reverse mortgages as a valuable tool for anyone in retirement. This financial product allows property owners 62 and older to convert real estate equity into spendable cash. While you’ll still owe money when you move or pass away, you won’t have a monthly payment until then.

Think of it like an advance on the eventual sale of your house. The lender will advance your cash, either upfront or spread out over time. Then, when you eventually move or pass on, the proceeds from your home sale will be used to pay off the amount you borrowed – plus interest.

The Reverse Mortgage for Purchase program is quickly gaining in popularity. This program allows seniors to purchase a home using a reverse mortgage and live mortgage payment-free. To qualify, borrower(s) simply need to be age 62 or older, buying or living in a home that’s their primary residence, and have their “required investment.”

The borrower will still be the homeowner and will always retain the title. In addition, there will not be a monthly mortgage payment, but the borrower will still be required to pay property taxes, homeowner’s insurance, HOA fees, basic upkeep and utility payments.

As mentioned above, the borrower will need to have their “required investment” or down payment. This amount is determined by a calculation set by HUD based on: the lesser of the sale price or appraised value, the age of the youngest of the borrowers, and the current expected interest rate.

Unlike a traditional mortgage where the loan reaches a “maturity date,” reverse mortgages have a “maturity event” that causes the loan to become due and payable. These “events” include: the last remaining borrower passing away, the homeowner selling the home, the last remaining borrower leaving the home for 12 consecutive months, or the homeowner defaulting on property taxes, HOA fees, or insurance.

Key takeaways

  • If you’re a homeowner aged 62 or older, a reverse mortgage can help you obtain tax-free income based on the equity in your home.
  • A reverse mortgage might give you more flexibility in retirement and allow you to stay in your home. While you won’t have a monthly payment, you’ll need to keep up with homeowners’ insurance premiums, property taxes, and home maintenance expenses or risk losing your home.
  • A reverse mortgage isn’t “free money.” It’s crucial to thoroughly understand the pros and cons before utilizing this product.
  • You don’t have to move; a reverse mortgage allows you to age in place.
  • You don’t have to pay taxes on the reverse mortgage payment to you. Tax rules can be complicated, however, so see a tax professional for advice before committing to a reverse mortgage.
  • You’re protected if the balance exceeds your home’s value. The result is that a mortgage lender can have no claims against your other assets or heirs in this scenario.

Assuming a reverse mortgage ends due to a homeowner’s death the heirs have options to either:

  • sell the home and repay the debt
  • keep the home and refinance
  • give the title of the home to the lender

Reverse mortgage downsides

  • Reverse mortgages have costs that include lender fees, FHA insurance charges, and closing costs.
  • You can’t deduct the interest from your taxes until you pay off the loan.
  • You could inadvertently violate other program requirements, such as Medicaid and Supplemental Security Income (SSI) programs. This might affect your eligibility for these benefits.
  • Your home can still be foreclosed if you don’t pay your property taxes, insurance and HOA fees.

Reverse mortgages can be a useful financial tool when utilized at the right time and in the right scenario. When used improperly, though, they can mean risking your house, certain government benefits and the inheritance you leave for loved ones. They can also exacerbate financial struggles for some homeowners.

If you’re considering a reverse mortgage, weigh the pros and cons carefully and consult your accountant and real estate professional.

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