Is A Reverse Mortgage Right For You?
If you are a senior citizen, you may be house rich and cash poor. What that means is you may have a lot of equity in your home, or even have it paid off, yet you may not have very much liquid cash in your checking or savings accounts. If so, a reverse mortgage may be just what the doctor ordered.
A reverse mortgage is a type of home loan that lets you convert part of the equity in your home into cash. Whereas ordinary mortgages begin with a large balance and are paid down with monthly payments to create equity; reverse mortgages take the equity that you built up over the years and pay it to you, let you live in the home without paying mortgage payments, or a combination of both.
There are four types of reverse mortgages:
- Home Equity Conversion Mortgages (HECM)
- HECM Saver (costs and loans are smaller)
- Special Purpose (for seniors with very low incomes), and
- Proprietary/Private reverse mortgages (expensive/jumbo loans)
The most popular type of reverse mortgage, by far, is the HECM. Over 90% of reverse mortgages are HECMs. The Federal Housing Administration (FHA) insures these mortgages, and their fees are regulated by the Department of Housing and Urban Development (HUD). These mortgages are safe for seniors (you must be over age 62 to qualify), and the homeowners retain title to their property.
The HECM borrowers don’t have to repay the loan until they no longer use the home as their principal residence or they fail to meet the obligations of the mortgage. Many seniors use the plan to supplement Social Security and to pay for unexpected medical expenses. Since the funds are considered a loan against the property, they aren’t considered income, and many public entitlements such as Social Security and Medicare aren’t affected. Further, the funds are usually considered tax-free.
It’s a good idea to consult with trusted legal and financial advisors to learn more about reverse mortgages. A reverse mortgage might just make your later years a little more golden.