As our population ages, you’re going to hear more about reverse mortgages (called “lifetime mortgages” in Britain). But most people don’t have any idea what they might be, or how they can help our elderly live a dignified and happy life.
A reverse mortgage is a bargain between a lender and an older person that the lender will provide the homeowner with money, usually in the form of a home-equity-style loan or line of credit. In return, the homeowner agrees that when they die their home will be turned over to the lender.
This is a very powerful form of lending for the elderly. Fifty years ago, homes were left to one’s heirs, who were sometimes numerous. Today, more and more elderly homeowners don’t have heirs — which means they also don’t have anyone who can care for them as they grow increasingly infirm. Our elderly population is left without loving relatives to care for them, though they often have great material wealth.
Yet most of our wealth as a nation is contained in our properties. While a 65-year-old man may own an estate of $500K on paper, it is likely that most of that estate is contained in the equity of their homes, businesses, and vacation properties. The older you get, the less attractive a loan prospect you are — and with the fixed income retired seniors often depend on, a loan is probably unpayable as well.
so what do these homeowners do when disaster strikes — when cancer treatment is necessary, when prescription medication isn’t completely covered, when storm or flood damage makes it vital to repair a home?
Obtaining A Reverse Mortgage
In the United States, homeowners who want a reverse mortgage must be at least 62 years old, and all outstanding mortgages on the property must be paid from the reverse mortgage (and personal funds, if necessary). Your income and credit rating may not matter. You may even be able to get a reverse mortgage on higher-end mobile homes and/or the land your home rests on.
Prior to borrowing money in a reverse mortgage program, you are required to go through financial counselling that has been approved by HUD; this is for your own protection, to ensure you fully understand what reverse mortgages are and what disadvantages may apply to you and your heirs. In some areas, state and local governments offer reverse mortgages, but these mortgages must be applied to specific purposes usually related to home improvement or taxes.
Your age, the appraised value of your home, and the starting interest rate on the loan are the variables that determine how much money you can borrow on a reverse mortgage. The bank is betting that they will turn a profit from the sale of your home that is greater than the interest that accumulates over the life of the mortgage, so the older you are, the more money you’re likely to get.
Your loan may come as a lump sum, monthly payments, a line of credit, or a combination of all three. Cash received is not taxable (the IRS counts it as a loan advance, which can’t be taxed) and will not affect your Social Security benefits provided the lump sum and other large amounts are out of your bank account in the month when they were received — so if you wanted a lump sum to pay your grandchild’s tuition, it needs to be paid right away in order to protect your eligibility. If you have other fixed income, discuss it with your financial counselor to determine whether this income could be affected. In most cases, you’re best off with a line of credit.
Taxes and insurance must be paid at all times. A lapse in either could put your loan in default — which means that in this case and only in this case, the lender could foreclose on your home even if you still live there.
Reverse Mortgage Benefits
Unlike many traditional mortgages, all the costs of a reverse mortgage can usually be financed by the loan itself. This means that you won’t have to have cash up front.
If you get a reverse mortgage and your home equity increases, you still own the additional equity and might be able to take out another mortgage on that. Even if you can’t, that equity value will revert to your heirs or to you when the home is sold. Your heirs will also have the option of refinancing the home instead of selling it to pay off the loan. Usually, the lender will allow the heir up to a year to obtain alternative financing before taking possession of the home.
If not enough money to pay off the loan is generated by the home’s sale, the lender is responsible for making up the difference. You and your heirs will owe nothing.
You can use money obtained from a reverse mortgage for anything.
Even if you owe more on your home than a reverse mortgage will pay, you may want to consider reverse mortgages. If you pay the balance of the other outstanding mortgage out of your own funds, it will free you from worry about foreclosure. A reverse mortgage holder can not claim your property until you have vacated it. And if you’re in bankruptcy, you can still get a reverse mortgage to preserve your ability to live in your home.
When Not To Get A Reverse Mortgage
A reverse mortgage is more expensive than other types of mortgage, so if you have a realistic option for getting a different type of mortgage, you should consider it. Not all reverse mortgage programs are the same; if one seems high to you, look around in your area for a cheaper one. While you don’t have to make payments on your loan like you would in a traditional mortgage, the amount of money you actually receive is very dependent on your interest rate and such items as insurance costs. Especially check with your local HUD office for government-sponsored programs that may be in your area; these are almost always the cheapest reverse mortgage programs.
If your home has little value or is in an area where property values are decreasing, you are unlikely to get an attractive reverse mortgage.
If you anticipate leaving your home within five years, you should look into other types of mortgage. A reverse mortgage in this circumstance will probably cost much more than alternate financing.
A reverse mortgage is not for everyone. However, if you don’t anticipate having heirs to leave your property to, and if you want to live in your current home until you die, it is an option you should consider.