What is a Reverse Mortgage?
A reverse mortgage is a loan against your home that you don’t have to repay as long as you live there.
With a reverse mortgage, the lender sends you money, and your debt (the amount you owe) grows larger as you keep getting cash advances.
That’s why reverse mortgages are called rising debt, falling equity loans.
As your debt grows larger, your equity (the value of your house minus what you owe) generally gets smaller.
However, your equity could increase if you’re in a strong housing market where home values are rising.
Reverse mortgages are different from regular home mortgages in two important respects:
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly payments. Your income generally has nothing to do with getting a reverse mortgage or determining the amount of the loan.
With a regular mortgage, you can lose your home if you fail to make your monthly repayments. With a reverse mortgage, however, you can’t lose your home by failing to make monthly loan payments — because you don’t have any to make!
WHO CAN GET A REVERSE MORTGAGE?
Reverse mortgages aren’t for everyone. To be eligible for a reverse mortgage:
You must own your home: In the early years of reverse mortgages, all the owners had to be at least 62 years old. Now, for a couple, you may qualify for a reverse mortgage if one person is at least 62 years of age and the other person is younger. However, such a couple will qualify for a lower reverse mortgage amount due to the younger spouse. (Life expectancy is part of the calculation.)
Your home must be your principal residence: If you have any debt against your home, as most borrowers do, use an immediate cash advance from the reverse mortgage to pay it off. Lenders are now required to perform a financial assessment analyzing the prospective borrower’s financial situation, including credit history and monthly income and expenses. This is so borrowers have enough cash flow to pay their property tax and home insurance bills.
HOW MUCH MONEY CAN YOU GET AND WHEN?
The point of taking out a reverse mortgage on your home is to get money from the equity in your home. The amount depends mostly on your home’s worth, your age, and the interest. The more your home is worth, the older you are, and the lower the interest rate, the more money you should realize from a reverse mortgage.
For all but the most expensive homes, the federally insured Home Equity Conversion Mortgage generally provides the most cash and is available in every state. In general, the most cash is available for the oldest borrowers living in the homes of greatest value over current debt (net equity) at a time when interest rates are low. The total amount of cash you actually end up getting from a reverse mortgage depends on how it’s paid to you plus other factors. You can choose among the following options to receive your reverse mortgage money:
Line of credit: Instead of receiving a monthly check, you can simply create a line of credit from which you draw money by writing a check whenever you need income. Because interest doesn’t start accumulating on a loan until you actually borrow money, the advantage of a credit line is that you pay only for the money you need and use. If you have fluctuating and irregular needs for additional money, a line of credit may be for you.
Lump sum: The third, and generally least beneficial, type of reverse mortgage is the lump-sum option. When you close on this type of reverse mortgage, you receive a check for the entire amount that you were approved to borrow. Lump-sum payouts usually make sense only when you have an immediate need for a substantial amount of cash for a specific purpose, such as making a major purchase or paying off an existing or delinquent mortgage debt to keep from losing your home to foreclosure.
WHEN DO YOU PAY THE MONEY BACK?
Some reverse mortgage borrowers worry about having to repay their loan balance. Here are the conditions under which you generally have to repay a reverse mortgage:
When the last surviving borrower dies, sells the home, or permanently moves away
Possibly, if you do any of the following:
Fail to pay your property taxes
Fail to keep up your homeowners insurance
Let your home fall into disrepair
If you fail to properly maintain your home and it falls into disrepair, the lender may be able to make extra cash advances to cover these repair expenses. Just remember that reverse mortgage borrowers are still homeowners and therefore are still responsible for taxes, insurance, and upkeep.