Prevent confusion and misunderstandings about reverse mortgages. Knowing how reverse mortgages work will help you secure the finances you may need and prevent surprises down the road.
homediggidy.com gathered essential information about reverse mortgages, their potential implications, and what it means to you as a homeowner.
What is a Reverse Mortgage?
A reverse mortgage is a mortgage loan for those homeowners 62 or older. Except this loan is typically secured by a residential property, this arrangement enables the borrower to access the unencumbered value of the property (the equity). Such loans are typically advertised to older homeowners and normally do not require monthly or compounded payments.
There are three kinds of reverse mortgages. These include:
Single Purpose Reverse Mortgages – Single-purpose reverse mortgages allow homeowners aged 62 or older to borrow against their home’s equity to fund a single, lender-approved purpose, like paying property taxes, performing maintenance, or making upgrades to the home.
Proprietary Reverse Mortgages – A proprietary reverse mortgage is a private loan allowing you to convert a fraction of your home’s equity into cash. As private loans, proprietary reverse mortgages are offered and insured solely by private lenders and are not backed by the government.
Federally-Insured Reverse Mortgages or Home Equity Conversion Mortgages (HECMs) – This type of reverse mortgage is the Federal Housing Administration’s (FHA) reverse mortgage program enabling you to withdraw a portion of your home’s equity. You can choose how you want to withdraw your funds; as a fixed monthly amount, a line of credit, or a combination of both. Read more about HECMs by visiting hud.gov/program_offices/housing/sfh/hecm/hecmhome
What is the Downside of Getting a Reverse Mortgage?
Reverse mortgages can have elevated costs that include lender fees or origination fees that are capped at $6,000 and depend on the amount of your loan, FHA insurance charges, and closing costs. Such costs can be included in the loan balance. However, that means the borrower would be left with more debt and less equity.
Note: These fees are why banks do not usually recommend reverse mortgages. Reverse mortgages come with more regulations than a regular mortgage, accounting for some of the additional fees. Lenders also charge significantly more, claiming they take on unique risks because reverse mortgages aren’t based on average income or a credit score.
Can You Walk Away from a Reverse Mortgage?
Due to the non-recourse aspect of reverse mortgages, a borrower or their estate does not have to pay back more than the home’s value, even if the loan balance is higher. Under these circumstances, the borrower (or estate) can grant a “deed in lieu” and walk away from the obligation of selling the home.
Reverse Mortgages and Tax Issues
Before any significant transaction involving your home or its equity, a tax professional should be consulted on the specifics of your individual case.
In a general sense, distributions from a reverse mortgage are loans and do not reflect taxable income. This money is not included in Adjusted Gross Income and does not impact Medicare premiums or Social Security benefit taxation. In this regard, proceeds from a reverse mortgage will behave similarly to a Roth IRA distribution. They can provide a way to increase income without moving you to a higher tax bracket.
Does a Reverse Mortgage Affect Social Security?
Yes and No. A reverse mortgage does not affect any regular Social Security payments or disability benefits. However, for those on Supplemental Security Income (SSI), any reverse mortgage proceeds must be used immediately. Retained funds will count as an asset and could impact one’s eligibility.
Can Borrowers Lose Their Home with a Reverse Mortgage?
Yes. You can lose your home with a reverse mortgage. However, there are only specific occurrences where this can occur, like:
- You no longer live in your home as your primary residence
- You move out or sell your home
- You are away from the home for more than six months of the year (excluding medical reasons)
- You are away from the home for twelve consecutive months
- You stop paying property taxes and homeowner’s insurance
- You stop maintaining the home according to FHA requirements
- You die, and your spouse or partner is not listed on the loan as a co-borrower or non-borrowing spouse
Failure to maintain or meet these requirements can trigger a loan default that may result in foreclosure.
Reverse Mortgages
In this article, you discovered information about the issuance, regulations, pros, and cons of taking out a reverse mortgage on your home’s equity.
Knowing what to expect when getting a reverse mortgage will help you determine how to receive the funds and how you may be required to spend them.
Ignoring the details and requirements of your reverse mortgage can result in loan default and foreclosure on your home.
Sources:
consumer.ftc.gov/articles/reverse-mortgages
benefits.gov/benefit/709
hud.gov/program_offices/housing/sfh/hecm/hecmabou
forbes.com/sites/wadepfau/2016/03/10/what-you-need-to-know-about-repaying-a-reverse-mortgage/