Description, Eligibility and Considerations
Reverse Mortgages: Description
A reverse mortgage is a special type of home loan for older Americans
that lets a homeowner convert a portion of the equity in their
home into cash -- with no repayment until the last surviving borrower
dies, sells the home, or no longer lives in the home as a principal
If you obtain a reverse mortgage loan, the lender pays you --
in a lump sum, a monthly advance, a line of credit, or a combination
of all three -- while you continue to live in your home. You do
not have to make monthly payments. You retain title to your home,
and the funds you receive may be used for any purpose and generally
are tax-free (without other features, like an annuity) and do not
affect Social Security or Medicare benefits. Many reverse mortgages
have no income restrictions.
Reverse Mortgages: Eligibility
To qualify for most reverse mortgages, you must be at least 62,
own your home, and live there as your principal residence. The
amount you are eligible to borrow generally is based on your age,
the equity in your home, and the interest rate the lender is charging.
Reverse Mortgages: Considerations
Because you do not make payments on a reverse mortgage, your
total debt increases over time. The interest that is charged
is added to the outstanding loan balance each month. As a result,
reverse mortgages reduce the equity in your home, leaving fewer
assets for you and your heirs. However, a “nonrecourse” clause,
found in most reverse mortgages, prevents either you or your
estate from owing more than the value of your home when the loan
Depending on the plan you select, your reverse mortgage becomes
due with interest when you move, sell your home, reach the end
of a pre-selected loan period, or die. When you die, the lender
does not take title to your home, but your heirs must pay off
the loan. Usually, the debt is repaid by selling the home or
refinancing the property.
You retain title to your home and are responsible for maintaining
it and paying all real estate property taxes, insurance, utilities,
fuel, maintenance, and other expenses. So, for example, if you
don’t pay property taxes or maintain homeowner’s
insurance, you risk the loan becoming due and payable.
Reverse mortgage lenders typically charge loan-origination
fees and closing costs, and they may also charge servicing fees
during the term of the mortgage. Insured plans charge insurance
premiums. You may be able to finance these costs if you want
to avoid paying them in cash. However, if you do, they will be
added to your loan amount and you will pay interest on them.
A reverse mortgage may have a fixed interest rate or an adjustable
interest rate that is tied to a financial index. An adjustable
rate will likely change during the lifetime of the loan, according
to market conditions.
Interest on reverse mortgages is not deductible on income tax
returns until the loan is paid off in part or whole.
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