A reverse mortgage is a type of home loan that allows you to access the equity in your house without having to sell it. This can be an advantageous option for older homeowners who wish to stay put or retire earlier than planned.
Reverse mortgages offer many advantages, such as:
You can continue living in your home with no monthly payments or costs
A reverse mortgage does not require taxation, so there’s no need to worry about the IRS prying into your finances.
Funds can be drawn out as needed, covering medical bills, long-term care fees and other costs. These funds may come in the form of a lump sum, annuity or line of credit depending on your specific needs and financial situation.
Generally, the proceeds from a reverse mortgage don’t need to be paid back as long as you live in your home, pay property taxes and insurance, and keep it in good condition. However, if you sell or pass away while still living there, either you, your spouse, or estate must repay the debt.
If your income is low and dependent upon a reverse mortgage as your primary source of income, this could present an issue. Without money to spare, you could find yourself forced into assisted living facilities or nursing homes.
There is a limit to how much debt you can borrow on a reverse mortgage. This amount depends on your age, the value of your home and whether or not you meet FHA’s debt-to-income guidelines.
If you don’t meet these requirements, your lender may require a Life Expectancy Set Aside (LESA). This sets aside part of your reverse mortgage balance for payments such as property taxes and homeowners insurance.
Your reverse mortgage can also be used to purchase a new principal residence or downsize your current one by using some of its proceeds. This is known as an HECM for Purchase and can be beneficial if you’re looking to relocate or downsize.
The HECM for Purchase is popular with widows who want to help a child purchase their home and avoid paying property taxes on the new residence. Furthermore, people moving from one state to another can utilize this program.
Finally, you have the freedom to select a repayment schedule that works for your situation and budget. You may make prepayments in full or partial amounts in order to reduce interest and avoid potential penalties if you don’t prepay your loan on time.
Reverse mortgages are designed for homeowners who wish to remain in their homes, but the process can be complex. To learn more about your available options and to determine which one best suits your individual situation, speak with a counselor or other knowledgeable professional.