Reverse Mortgage
A reverse mortgage is a tax-free way for seniors over age 62 to use the equity in their homes for income. The funds may be used for almost anything, except under certain low-cost state or local programs. A reverse mortgage can be a valuable source of funding, but is not right for everyone. This article provides a brief guide to the factors involved in reverse mortgages.
Qualifying for a Reverse Mortgage
It is not difficult to qualify for a reverse mortgage. The borrower must
be over the age of 62 and must own a home. Manufactured homes must have
been built after 1976 in order to qualify, although there is no restriction
on the age of traditional homes. Single family houses, condos, townhouses
and 2-4 unit multifamily dwellings may qualify. In New York, some programs
exist to offer reverse mortgages to those living in co-ops.
There are no credit or income requirements for a reverse mortgage, making the program particularly attractive to seniors on limited incomes. An active bankruptcy (one that has not been discharged) will slow the process, however.
A reverse mortgage must be the only mortgage on the property. Therefore, if a mortgage currently exists, it must be paid off. The funds from the reverse mortgage can be used to pay the existing mortgage, with any leftover funds going to the homeowner.
Costs of a Reverse Mortgage
A reverse mortgage typically carries relatively high closing costs.
However, these fees can generally be rolled into the loan balance. It is
important to keep in mind that rolling in costs will result in a higher
total cost and additional interest.
Some state and local governments offer low-cost reverse mortgages. These mortgages generally carry very specific restrictions and can be used only for specified costs.
Social security and Medicare are generally not affected by a reverse mortgage. Supplemental programs for low-income Americans, such as Medicaid and SSI, may be affected if money remains in the homeowner's account at the end of the month in which it was obtained. Although counseling is a mandatory step in the application process, it is also recommended that homeowners seek independent legal and financial advice before making any financial decisions that could affect their benefits.
Obtaining the Funds
A reverse mortgage may be structured as a one-time, lump sum payment, a
line of credit or fixed monthly payments to the borrower. The lump sum
payment generally carries the highest fees, but is worthwhile if a
significant amount of cash is needed quickly.
Repaying a Reverse Mortgage
The reverse mortgage is repaid when the homeowner sells the house, dies or
moves out for a designated period (typically 12 months). The house is
generally sold to repay the mortgage, although the borrower or his heirs
may refinance the mortgage or repay it from personal funds.
The Bottom Line
A reverse mortgage is a wonderful way for seniors to raise extra cash.
However, it is not the best choice for everyone. Financial counseling is
required as part of the application process for a reverse mortgage.
Nonetheless, outside financial and legal advice are highly advisable in
order to compare options and select the one that is right for you.
