Reverse Mortgage Home Loans
Reverse Mortgage Loans
A reverse mortgage is a mortgage loan, usually secured by a residential property, that enables the borrower to access the unencumbered value of the property. The loans are typically promoted to older homeowners and typically do not require monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner’s insurance. Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.
Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home.
Why A Reverse Mortgage
A reverse mortgage is the only way to access home equity without selling the home for seniors who don’t want the responsibility of making a monthly loan payment or who can’t qualify for a home equity loan or refinance because of limited cash flow or poor credit.
Key Takeaways
- A reverse mortgage is a type of loan for seniors ages 62 and older.
- Reverse mortgage loans allow homeowners to convert their home equity into cash income with no monthly mortgage payments.
- Most reverse mortgages are federally insured, but beware a spate of reverse mortgage scams that target seniors.
- Reverse mortgages can be a great financial decision for some, but a poor decision for others. Be sure to understand how reverse mortgages work and what they mean for you and your family before deciding.
How a Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments and only pays interest on the proceeds received. The interest is rolled into the loan balance so the homeowner doesn’t pay anything up front. The homeowner also keeps the title to the home. Over the loan’s life, the homeowner’s debt increases and home equity decreases.
When the homeowner moves or dies, the proceeds from the home’s sale go to the lender to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner (if he or she is still living) or the homeowner’s estate (if the homeowner has died). In some cases, the heirs may choose to pay off the mortgage so they can keep the home. Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the IRS considers the money to be a loan advance.
Types of Reverse Mortgages
The most common is the home equity conversion mortgage or HECM. The HECM represents almost all of the reverse mortgages lenders offer on home values below $765,600. If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.
When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:
- Lump sum: Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.
- Equal monthly payments (annuity): For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.
- Term payments: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.
- Line of credit: Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts actually borrowed from the credit line.
- Equal monthly payments plus a line of credit: The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.
- Term payments plus a line of credit: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit.
- It’s also possible to use a reverse mortgage called a “HECM for purchase” to buy a different home than the one you currently live in.
Would You Benefit From A Reverse Mortgage
A reverse mortgage might sound a lot like a home equity loan or line of credit. Indeed, similar to one of these loans, a reverse mortgage can provide a lump sum or a line of credit that you can access as needed based on how much of your home you’ve paid off and your home’s market value. But unlike a home equity loan or line of credit, you don’t need to have an income or good credit to qualify, and you won’t make any loan payments while you occupy the home as your primary residence.
All loans subject to underwriter approval; terms and conditions may apply. Subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.