In 1989, the Federal Housing Administration created a product called the Home Equity Conversion Mortgage(HECM). This was the beginning of reverse mortgages. Rules and regulations from the U.S. Department of Housing and Urban Development(HUD) insure lenders follow strict rules and regulations. FHA and HUD reverse mortgages protect consumers and help you to search for FHA approved lenders.
With a regular mortgage, the homeowner makes monthly payments over a specific period of time, usually 30 years. With a reverse mortgage the interest is not due till the loan reaches maturity. As the homeowner, your responsibility is to reside in the home while paying the property taxes and insurance. You never make a payment on the money you have borrowed.
You still own your home
You may still reside in your home during the term as long as you continue to pay taxes and insurance. Every month you will receive a monthly statement which will outline all interest charges and balance information. What you won't find on the statement is a coupon to make a payment, because none is due.
What are the qualifications?
If you are a U.S. citizen and a permanent resident, are 62 years or older, and have substantial equity in your home, you qualify. The loan amount you qualify for depends on your age, interest rates, and the homes value. There are no income requirements or credit scores involved. All you have to do is continue to live in the loan.
Do I Have the Option to Pay the Loan Back?
If you want you can make voluntary repayments of the interest in full or in part you can, without penalty. Plus, the interest you pay is deductible just like with a regular mortgage. You also can pay off the entire loan at any time with cash, by refinancing or by selling the home.
How is the Loan Repaid?
The reverse mortgage is not due until the owner passes away or the property is not occupied. Upon passing away the heirs have time to sell the house or refinance it to pay back the balance of the loan. Usually you have up to a year to do this. If your heirs do not act, the reverse mortgage lender moves to foreclose on the property. If the sale of the property does not provide ample funds to satisfy the reverse mortgage, the mortgage insurance fund will make up the difference. Paying for this insurance is part of the costs of a reverse mortgage.
Pros
- You can stay in your home and not worry about making mortgage payments.
- You have money to live on and spend on retirement activities.
- Cash you receive from the mortgage is not considered income and not taxable.
Cons
- Reverse mortgages are not for living in your home for a short, to be financially feasible you need to stay in your home for an extended period of years.
- You still are responsible for taxes and insurance, these may not be affordable on a retirement budget.
- Fees and insurance, depending on the state you reside can be high. Check before you proceed with a reverse mortgage.
- Cash proceeds can impact eligibility for those receiving "needs" based state and local assistance.
As with any financial product involving large amounts of money and contracts it benefits you to seek out a reputable lenders. You should compare offers from multiple banks and brokers. Remember all reverse mortgages carry the same protections and laws established by the FHA. There is only one HECM so make sure you don't pay extra fees and gotchas.
