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Reverse Mortgage
Reverse Mortgage
Contrary to a "normal" mortgage a Reverse Mortgage pays the borrower. Typically, a senior citizen will take out a Reverse Mortgage on their home to pay bills, pay for home improvements, etc. This is done by cashing in on home equity in lieu of paying off the loan when the last living borrower dies, sells the home or no longer lives in the home as their primary residence. To date, there are three types of Reverse Mortgages:
Single Purpose Reverse Mortgages
Single Purpose Reverse Mortgages are offered by state and local government agencies and non-profit organizations. They, generally, cost very little but have tight restrictions on the size of the mortgage and what the money can be used for. Usually, a Single Purpose Reverse Mortgage needs to be used for home repairs or improvement or property taxes.
Federally Insured Reverse Mortgages
Federally Insured Reverse Mortgages or Home Equity Conversion Mortgages (HECM) are backed by the U.S. Department of Housing and Urban Development (HUD) and have higher costs associated with them than Single Purpose Reverse Mortgages. There is typically no income or medical requirements for this type of Reverse Mortgage and the funds can be used for any purpose. Before a borrower can close on a Federally Insured Reverse Mortgage they must meet with an independent government approved housing counseling agency to discuss the overall costs of the loan, future financial considerations, etc.
Proprietary Reverse Mortgages
Proprietary Reverse Mortgages are offered by private financial institutions. These are typically harder to qualify for and tend to cost more than the other two types of Reverse Mortgages. The main benefit of a Proprietary Reverse Mortgage is the ability to take out a large sum of funds if the borrower has a highly valued home with an acceptable amount of equity.
A Reverse Mortgage has several benefits. Not only is it an non-taxable source of income, it doesn't affect Social Security or Medicare benefits, the borrower retains the title on the home and doesn't make repayments until death, the home is sold or the borrower no longer lives there as the primary residence. The amount that can be borrowed depends on the borrower's age, the type of mortgage, appraised value of the home, current interest rates, and the neighborhood that the house is located in. Basically, the older the borrower is, the more valuable the home, and the less that is owed on it the more money that can be borrowed in a Reverse Mortgage.Overall, a Reverse Mortgage can be a convenient form of income during retirement. However, one must consider possible financial implications. A Reverse Mortgage typically has fees imposed on it by the lender. In addition, interest is added into the amount owed, decreasing equity in the home even further and the borrower is still responsible for property taxes, insurance, maintenance, etc. Being too careless with a Reverse Mortgage could use up all of the equity in a home leaving the borrower and their heirs with nothing.