A reverse mortgage can be a great way for a homeowners to take advantage of accumulated home equity to cancel their mortgage payments, create a monthly income stream, provide funds for home improvement and other needs, or a combination of all three.
A reverse mortgage is different than a traditional mortgage.
With a traditional mortgage you make monthly mortgage payments, but with a reverse mortgage any funds you owe, through receipt of monthly payments or of periodic lump sum payments, accumulate over time and are then repaid when you sell your home.
Another difference between traditional mortgages and reverse mortgages is that you can never owe more than the value of your home. In the unlikely event that your home is worth less than your loan balance at the time the home is sold, any shortfall is forgiven with no adverse credit profile consequences.
Like traditional mortgages, you retain full ownership of your home. When you sell your home the reverse mortgage is paid off and you retain the remaining equity.
What is a Reverse Mortgage?
A reverse mortgage is a loan designed to allow homeowners age 62 and older to draw upon the equity in their homes either by a lump sum distribution(s) or by monthly instalments, providing income to supplement other income, such as Social Security and pension benefits. Any amounts not used remain as a line of credit that can be used in the future.
The reason this type of mortgage is called a “reverse mortgage” is because funds from accumulated home equity flow outward to the homeowner instead of flowing from the homeowner to the lender. Eventually the money paid to the homeowner is repaid with interest, however it generally doesn’t become due until the homeowner sells the home.
Most reverse mortgages are Federal Housing Administration insured Home Equity Conversion Mortgages (HECM). The FHA guarantee is important because it ensures that your equity distributions will take place no matter what institution owns or services your loan in the future. The FHA charges up front and monthly mortgage insurance premiums to maintain a reserve fund for these distribution guarantees. The reserve fund is designed to pay any funds that would normally come from the institution that owns the loan so that this burden will not fall on the US taxpayer.
What are the most common reasons why homeowners get a Reverse Mortgage?
There are many reasons why people get reverse mortgages. Here are some of the most common:
- Eliminate mortgage payment: the reverse mortgage takes the place of your current loan, replacing a loan that requires monthly payments with one that does not.
- Supplement monthly cash flow: lifetime monthly payments can be set up to continue as long as you own your home.
- Obtain funds for home improvement or any other reason: there are no restrictions on the use of distributions from a reverse mortgage. People use distributions for home repair/remodel, making major purchases such as new car, paying off other debt, assisting family members with down payments or debt payoff, and often just to improve quality of life by enabling more frequent travel, for example.
- Delay receipt of Social Security benefits: Social Security benefits increase dramatically if they are delayed from age 62 to age 70. By substituting reverse mortgage distributions for Social Security distributions during that time period one can greatly increase the long-term Social Security payout.
- Diversification of investments: If one believe one can earn more investing than what is accumulated in interest, the reverse mortgage could be a useful addition to one’s investment strategy.
How do I qualify for a Reverse Mortgage?
If you own your home and are at least 62 years of age you are eligible for a reverse mortgage. There are some limitations on eligible properties:
- Most single-family units are eligible
- FHA-approved condominiums
- Manufactured homes can qualify under certain circumstances
- Most mobile homes and co-ops are not eligible
- 2-4 unit owner occupied properties
Are Reverse Mortgages Safe?
FHA-insured reverse mortgages are highly regulated financial products:
- Unlike traditional mortgages, you can never be forced to sell or vacate your home provided that you pay your property taxes and home insurance premiums
- Unlike traditional mortgages, you can never owe more than your loan balance or the value of the property (whichever is lower)
- Before you can enter into a reverse mortgage application you are required to participate in credit counselling by an FHA-approved credit counselling agency to ensure that you fully understand the parameters of this loan product and that it appears to be a suitable product for your situation.
- The FHA guarantee means that even if the owner of your loan is financially unable to pay your benefits the FHA will step in to make sure these payments are maintained.
- A reverse mortgage does not have to be repaid until you leave the residence, either by moving or upon your death.