If you’re 62 or older looking to pay off your mortgage, supplement your income or pay for healthcare expenses, you may want to consider a reverse mortgage.
What is a reverse mortgage?
A reverse mortgage allows you to convert part of the equity of your home into cash, without having to sell your home or pay or additional bills. A reverse mortgage is tricky though, because it could mean fewer assets. When you have a regular mortgage, you make monthly payments so you’re buying your home over time. With a reverse mortgage, you receive a loan, and it takes part of the equity of your home and converts it into payments for you. This money is usually tax-free, and you don’t have to pay the money back for the entirety of the time you live in your home. In the event you pass away, sell your home or decide to move out, either you, your spouse or your estate would repay the loan. In some cases, this means selling the home in order to get the money to repay the loan.
What are the different types of reverse mortgages?
Single-purpose reverse mortgages. This is the least expensive option, although they aren’t available everywhere. These loans can only be used for a specific purpose, which the lender will specify. For example, they may state that the loan can only be used to pay for home repairs or improvements. Luckily, most homeowners with low to moderate incomes can qualify.
Proprietary reverse mortgages. These are private loans backed by companies who create them. This might be a good option if your home is of higher value, because you could get a high loan advance.
Home Equity Conversion Mortgages (HECMs). These are federally-insured reverse mortgages backed by the U.S Department of Housing and Urban Development (HUD). These are the most realistic, as they can be used for any purpose.
What are some things I need to be aware of with reverse mortgage loans?
- There are fees and other costs. Lenders typically charge an origination fee along with various closing closets and servicing fees. You might also be charged mortgage insurance premiums.
- You’ll owe more over time. Because you’re receiving money, you’ll have to pay interest. This interest is added onto the balance you owe each month. Unfortunately, this means the amount you owe will increase as the interest of your loan adds up over time.
- Interest is not tax deductible. Interest rates on reverse mortgages aren’t deductible on income tax returns until the loan is paid off, whether partially or in full.
- You’ll experience unexpected costs. Although you keep the title on your home with a reverse mortgage, you’ll also be responsible for property taxes, insurance, utilities, and other expenses. If these costs aren’t paid, the lender might ask you to repay your loan. Luckily, a financial assessment is required when applying for this mortgage, so you know what you can handle. The lender might ask for a “set-aside” amount to pay taxes and insurance during the length of the loan.
How do I go about shopping for a reverse mortgage?
There are a few questions to ask yourself when comparing reverse mortgages. As you research, ask yourself:
- Do I want a reverse mortgage to pay for home repairs or property taxes?
- Do I live in a higher-valued home?
- Do I have a clear understanding of associated fees and costs?
- Do I understand the total costs and loan repayment?
Whether you are a first time home buyer or purchasing a multi-million dollar home, you have found the right person. Ken Venick has over 30 years of experience in the mortgage loan business and can put you in the right mortgage loan product for their unique needs. We can help answer all your questions on reverse mortgages, and help point you in the right direction. Contact us today!