A “reverse mortgage” is a tax exempt home loan that allows a homeowner to take cash-out of their home using their existing home equity, without taking on a monthly payment or having to sell their home. This loan program is available to homeowners aged 62 or older, who occupy a property as their principal residence. Eligible property types include single-family residences, condominiums, townhouses, and even manufactured homes built after June 1976.
A reverse mortgage works in quite the opposite way of a traditional mortgage, essentially allowing a homeowner with accrued equity in their home to begin pulling cash-out of their home on a monthly or lump sum basis. They can then use the proceeds for any pending expenses such as home improvement, medical costs, or simply to pay off existing bills or property taxes.
The main benefit of a reverse mortgage is that executing one won’t result in a monthly mortgage payment, as you’d find with a typical mortgage. And to the same effect, the loan never has to paid back*, as it simply depletes the equity of your home. (*Once you move out of your home, you must pay back the loan plus interest and any other fees to the mortgage lender, but the remaining equity will be yours, and the debt can never exceed the value of your home.)
Interest from a reverse mortgage is tax deductible, but not until the loan is paid off in part or in full.
Reverse mortgages come with a variety of terms, including both fixed and variable rate plans, and associated fees such as loan origination fees and servicing fees, as well as other closing costs.
There are three types of reverse mortgages:
Single-purpose reverse mortgages
Federally-insured reverse mortgages
Proprietary reverse mortgages
Single-purpose reverse mortgages are generally offered to lower income homeowners by non-profit organizations and local government agencies. They allow a homeowner to use the proceeds for one single purpose as the name suggests, usually to payoff property taxes or for home improvements. They have low associated fees, but are limited in their offerings.
A federally-insured reverse mortgage, otherwise known as a Home Equity Conversion Mortgage (HECM) is less restrictive than a single-purpose reverse mortgage, though it has higher associated costs. This type of mortgage is backed by the U. S. Department of Housing and Urban Development (HUD) and requires the homeowner to meet with an independent government-approved housing counselor. Homeowners can use this type of reverse mortgage for any purpose, or multiple purposes, and can select how they want to receive the money. HECMs will carry the same interest-rates regardless of lender, but the closing costs and servicing fees can vary, so make sure you shop around.
A proprietary reverse mortgage is similar to a Home Equity Conversion Mortgage, though they are privately-backed loans and usually the most expensive. They can provide more money up front than a HECM, but the initial credit line will not grow over time like a HECM.
With a HECM or proprietary reverse mortgage, a homeowner can elect to receive the money as a line of credit they can draw upon, in monthly installments, or as a combination of the two.
Reverse Mortgage Repayment
A reverse mortgage must typically be repaid when one of the following events takes place:
- You fail to pay property taxes or homeowners insurance.
- You permanently move to a new principal residence.
- You, or the last borrower, fail to live in the home for 12 successive months.
- You allow the property to deteriorate without making the necessary repairs.
Make sure you use a reverse mortgage calculator to compare all the available programs to see which will work best for you. Beware of companies that masquerade as private organizations offering reverse mortgage advice. While they may appear to be government backed agencies, many are simply just banks or lenders pushing consumers to execute a reverse mortgage.