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Reverse Mortgages
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 residence.

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 is repaid.

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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