If you are a senior, you have likely heard of a reverse mortgage. As the population of older Americans continues to grow at an unprecedented pace, products and services geared toward seniors are flooding the market. The reverse mortgage is one of those. If you own your home, you have probably received several advertisements in the mail offering you a reverse mortgage. Before you consider accepting one of those offers, you should fully understand what pros and cons. Toward that end, the Affton elder law attorneys at Amen, Gantner & Capriano, Your Estate Matters, LLC provide some basic information about reverse mortgages and the factors you should consider before accepting one.
What Is a Reverse Mortgage?
A reverse mortgage is a loan for senior homeowners that allows a homeowner to access a portion of the home’s equity and convert it into cash using the home as collateral. Initially, the concept of a reverse mortgage was conceived as a way to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and/or pay for costly health care; however, the proceeds of a reverse mortgage can be used for anything you wish. Instead of you paying the bank for the term of the mortgage, the bank pays you. You can receive the proceeds from a reverse mortgage in several different ways, including:
- Lump sum – a lump sum of cash at closing.
- Tenure – equal monthly payments as long as the homeowner lives in the home.
- Term – equal monthly payments for a fixed period of time.
- Line of Credit – draw any amount at any time until the line of credit is exhausted.
For example, imagine that you own your home outright and its current market value is $250,000. You might decide to take out a reverse mortgage for $100,000. You could choose to take the entire $100,000 as a lump sum at the closing or you might prefer to receive monthly payments. Once you take out the reverse mortgage, the equity in your home decreases by $100,000 to $150,000 and that $100,000 mortgage loan must eventually be repaid. The actual amount you will be eligible to receive in a reverse mortgage will typically depend on several factors, including the age of the youngest borrower, current interest rate, appraised value of the home, and government imposed lending limits.
Who Is Typically Eligibility For a Reverse Mortgage?
To be eligible for a Home Equity Conversion Mortgage (HECM), which is a reverse mortgage that is insured by the Federal Housing Administration (FHA), the youngest borrower on title must be at least age 62. If the home is not owned free and clear, then any existing mortgage must be paid off using the proceeds from the reverse mortgage loan at the closing. Beyond those two important criteria, there are additional financial eligibility criteria established by HUD that you must meet.
When Does a Reverse Mortgage Come Due?
As a general rule, a reverse mortgage typically does not become due until the death of the borrower or until the borrower is no longer living in the home as his/her primary residence. Of course, you must abide by the terms of the loan by paying the required property taxes, keeping homeowners insurance current and maintaining the home according to Federal Housing Administration requirements.
Estate Planning Considerations
If you take out a reverse mortgage, at the time of your death or in the event that the home ceases to be your primary residence for more than 12 months, the loan will usually become due, meaning you (or your estate) must either repay the reverse mortgage or put the home up for sale to pay for the mortgage. If the home is sold, and the equity in the home is higher than the balance of the loan, the remaining equity belongs to you or to your estate. On the other hand, if the sale of the home is not enough to pay off the reverse mortgage, the lender (not the borrower) must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. This is important because it means that even if the sale of your home, after you are gone, fails to cover the amount owed to the reverse mortgage, your other assets (such as vehicles, investments, vacation home) are not at risk of being sold to repay the loan.
How Is a Reverse Mortgage Different from a Home Equity Loan?
If a reverse mortgage is based on the existing equity in your home, you may be wondering how it differs from a home equity loan. Unlike a Home Equity Line of Credit (HELOC), the HECM does not require the borrower to make monthly mortgage payments. Instead, the entire loan is paid off when the borrower no longer lives in the home or after the borrower’s death. In addition, with a reverse mortgage, any existing mortgage or mandatory obligations must be paid off using the proceeds from the reverse mortgage loan which is not typically a requirement for a home equity loan.
Contact Affton Elder Law Attorneys
Please download our free estate planning worksheet. If you have additional questions or concerns about whether a reverse mortgage is right for you, contact the experienced Affton elder law attorneys at Amen, Gantner & Capriano, Your Estate Matters, LLC by calling (314) 966-8077 to schedule an appointment.