The simplest definition of a reverse mortgage is, “a special type of mortgage allowing a senior homeowner to tap the equity of their home and eliminate the monthly mortgage payment.” As long as the borrower lives in the home, they can’t default on the loan or be forced to move, so long as they maintain the home, pay property taxes and provide the required homeowner’s insurance. When the borrower no longer lives in the home, for whatever reason, the loan is repaid.
The Daily World, in “Reverse mortgages—your questions answered,” explains that in order to qualify, the homeowner must be 62 years of age or older and pass a credit check. Anyone applying must also use the home as their primary residence.
With a reverse mortgage, the homeowner retains the title and ownership during the life of the loan and can opt to sell the home at any point. The home can also have an existing mortgage. Many borrowers apply reverse mortgage funds to an existing mortgage to eliminate monthly mortgage payments.
The amount of money one can receive from a reverse mortgage is determined by the age of the youngest spouse, the value of the home and the current interest rate. The money from a reverse mortgage can be received in a lump sum, in monthly payments, or through a line of credit. It can also be any combination of these options.
Reverse mortgages are insured by the Federal Housing Authority and the Department of Housing and Urban Development (FHA/HUD). If something happens to the lender, HUD takes over the loan and becomes the reverse mortgage servicer.
There is one important thing to keep in mind. Because there are no monthly payments, the interest on the reverse mortgage loan increases over time. That means the balance due is going to be higher than when the loan originated. It is entirely possible that when you sell or move, you will have little or no equity in the home. The good news: today the borrower and/or their heirs are protected by law and they will never owe more than 95% of the market value of the home when the loan becomes due.
However, you’ll need to be careful. If you’ve already created an estate plan, your home may be in trust, which could create some issues like it would with a refinance of a mortgage. Aligning your assets with your estate plan to ensure the plan is effective is crucial, so make sure you work with an experienced estate planning attorney.
While we at Family Estate Planning Law Group don’t sell reverse mortgages, we know that in certain situations, a reverse mortgage can be a useful tool. Speak with your real estate or financial professional to determine if this tool would be effective for you, and explore our website for more information on the importance of aligning assets with your estate plan!
Reference: The Daily World (November 18, 2016) “Reverse mortgages—your questions answered”