How Do Reverse Mortgages Work
How Do Reverse Mortgages Work? – The Ultimate Guide
If you’re getting near retirement age you may have come across this financial product. Just about everyone asks the same question, just how do reverse mortgages work? They continue to grow in popularity and the basics are relatively simple.
A reverse mortgage is designed for senior adults getting near retirement or already retired. Its similar to a conventional mortgage in one respect – it allows you to borrow against the equity that you have in your personal residence.
However, unlike a traditional mortgage where you are required to make monthly payments of principal and interest to repay the loan, with a reverse mortgage, you don’t. As long as you live in the home, none of the mortgages has to be repaid. Not until you sell the home, or it is no longer your personal residence, or the last borrower dies, is the loan repaid.
This program is administered by the FHA and does have certain conditions that must be met.
From a financial perspective, how do reverse mortgages work?
A reverse mortgage does differ from a conventional mortgage or a home equity loan. The latter two allow borrowing using the equity in your home, and must be repaid over a certain period of time. Not so with a reverse mortgage.
In addition, the borrowers have several choices to make as far as how the loan proceeds can be used. Some like to draw the proceeds and put it in a savings account for some emergency expense. Some seniors, who don’t have enough saved in their retirement account, will draw a certain amount each month to supplement their income.
Some borrowers ask if the money being drawn is taxable income, and the answer is no. [KiwiClickToTweet tweet=”You can’t deduct the accruing interest on a reverse mortgage until it’s paid.” quote=”It should also be noted that the interest accruing on the reverse mortgage is not deductible until it is paid”]. At that time, it may or not be deductible based on the purpose of the borrowed funds. This article explains the new 2018 tax law change
There are a few requirements by the FHA and HUD that must be met. Firstly, if you have any type of federal loan, it can’t be in a delinquent status. In addition, you must have the income or other assets to keep the property in good repair. Along with that, your income must be able to pay the homeowner insurance and real estate taxes.
Should any of the aforementioned requirements not be met, the lender can trigger the loan to be in default, and due and payable.
Several years ago, when reverse mortgages were first introduced, some predatory lenders were taking unfair advantage of the elderly, and causing them to lose their homes. Finally, HUD stepped in and plugged up the holes in the system.
Are reverse mortgages a good option?
There are many unique situations that elderly homeowners are in. Many have struggled to repay their home mortgage in full with the expectation of leaving it to their children.
Many others have medical issues that are keeping them in a nursing home and probably can’t qualify for a reverse mortgage.
The secret to being advised of the best options for anyone interested in this financial product is qualified education. The first step is to find an experienced lender in this field who will be able to guide you through the entire process successfully.
How does one qualify for a reverse mortgage?
- Age – As the borrower, you must be 62 years of age or older. This type of mortgage was intended for senior citizens to enable them to supplement their retirement income.
- Home ownership – To qualify for a reverse mortgage, the deed must be in your name. Any open loans against the home must be repaid from the proceeds of the reverse mortgage.
- Home type – Generally, a single family home or a two to four apartment building, provided one of them is your personal residence, will qualify. In addition, condos and co-ops provided they meet certain requirements of the FHA and HUD. Income producing properties generally don’t qualify.
- Required counseling – All applicants for a reverse mortgage, with no exceptions, will have to meet with a HUD-approved Home Equity Conversion Mortgage Counselor. At this meeting. your options and the various financial requirements will be explained. Any questions you may have will be addressed as well
- Residency requirement – The home that you intend to place a reverse mortgage on must be your principal personal residence. Any other domicile where you live for twelve months or more could trigger a default.
There are situations where taking out a reverse mortgage might not be your best option. Before doing so, talk with a qualified counselor and ask the question how do reverse mortgages work and is it my best option?