The world of finance can sometimes be difficult to navigate, and when it comes to mortgages, the process can seem even more alien. Many retirees or older homeowners may have heard about the concept of reverse mortgages, but are unsure of the specifics. So, in an effort to simplify and demystify, here are some things you should know about reverse mortgages.
First of all, let’s go through the very basic definition: In its simplest form, a reverse mortgage is a loan. Specifically, it is a type of loan that lets homeowners convert part of the equity in their home into cash. Unlike a normal loan, however, a reverse mortgage differs in that you don’t need to repay the loan until the home is sold, or the homeowner moves out or dies.
1. For Older Homeowners Only
Reverse mortgages are specifically designed for older homeowners. To qualify for most reverse mortgages, you must be at least 62 and live in your home as your primary residence. This option is typically explored by older homeowners who are in need of additional income and have a substantial amount of equity in their home.
2. Different Types of Reverse Mortgages
There are three different types of reverse mortgages: single-purpose reverse mortgages, federally insured reverse mortgages also known as Home Equity Conversion Mortgages (HECMs), and proprietary reverse mortgages.
– A single-purpose reverse mortgage is offered by some state and local government agencies and non-profit organizations, and it can only be used for one specific purpose, which is specified by the lender (e.g. house repairs).
– HECMs are federally insured reverse mortgages, which are backed by the U.S. Department of Housing and Urban Development. These are the most popular type of reverse mortgages.
– Proprietary reverse mortgages are private loans backed by the companies that develop them.
3. Payout Options
There are different options as to how you can receive the funds from a reverse mortgage. You can select a term or tenure payment, lump-sum payout, credit line or a combination of these options.
4. Impact on Social Security and Medicare
Generally, funds received from a reverse mortgage will not affect your Social Security or Medicare benefits. However, if the funds are not spent within the same month that they are received, they could count as an asset and potentially affect the eligibility for Medicaid or other public assistance programs.
5. Impact on Heirs
Once you pass away or permanently move out, the reverse mortgage needs to be repaid. Often, this involves selling the home in order to pay off the loan. If the sale of the home does not cover the amount of the loan, your heirs are not responsible for any shortfall. But this also means that the property might have to be sold and your heirs would therefore not be able to inherit it.
6. The Importance of Counseling
Before you can apply for a Federally insured reverse mortgages (HECMs), you are required to meet with a counselor from an independent, government-approved housing counseling agency. This requirement is designed to ensure that you fully understand the financial implications and responsibilities of taking out a reverse mortgage. You will discuss other options and alternatives to determine if a reverse mortgage is the best fit for you.
In conclusion, a reverse mortgage can be a key tool for seniors who are in need of extra income in their retirement years, while also allowing them to stay in their homes for as long as they want. However, it also comes with its share of disadvantages. Understanding the specifics about reverse mortgages can help homeowners make an informed decision about whether this financial product is right for them. As with all major financial decisions, it’s always wise to seek advice from a financial advisor.