A reverse mortgage enables homeowners, age 62 or older, to utilize the equity in their primary residence, whether a private house or condominium, to obtain a loan that does not require repayment until the homeowner moves, sells the home or dies. Reverse mortgages can turn home equity into ready cash for retirement planning purposes, at-home elder care or any other desired purpose.
While the national borrowing limit was $417,000, the economic stimulus package increased it to $625,500, at least for this year. The actual loan amount, however, depends on the home's value, its location, interest rates, and the borrower’s age. AARP's reverse mortgage loan calculator can help you determine how much you can expect to be able to borrow based on these factors.
Seniors are afforded certain protections against high fees and aggressive marketing. Fees are capped at 2% of the first $200,000 borrowed and 1% on the remainder, with a $6,000 maximum. Lenders are not allowed to condition the reverse mortgage grant on purchasing associated products or services and are prohibited from working with others who may try to sell borrowers financial products as part of the loan arrangement.
In January 1, 2009, the Federal Housing Administration (FHA) began insuring reverse mortgage loans, so that qualified borrowers can now purchase a home using a reverse mortgage instead of a traditional mortgage. The FHA is currently the only source for reverse mortgage funds. It lends the money through its home-equity conversion mortgage program (HECM).
The funds are available as follows: (1) in a lump sum, (2) in the form of a letter of credit to be drawn upon at the borrower’s option, (3) in regular periodic payments, or (4) in any combination of these alternatives. Most borrowers opt for the line of credit because it enables them to obtain the money as needed without any interest charged on the unused loan balance.
Borrowers who take out a reverse mortgage still own their homes. The lender is owed the loan amount plus interest, which is usually paid by the borrower’s estate. The repayment amount cannot exceed the borrower's home value at the time the loan is repaid.
While reverse mortgages offer many advantages, there are significant downsides, including high closing costs, nearly double those of conventional mortgages, and the payments received may affect the borrower’s eligibility for government benefits, such as Medicaid or Social Security. Further, any existing mortgage on the property must be paid off before a reverse mortgage can be obtained or the amount owed can be deducted from the reverse-mortgage proceeds.
If you want to safeguard your home to pass down to your children, a reverse mortgage is probably not a good idea. The home will likely have to be sold to pay off the loan when the borrower moves out permanently or dies unless the heirs can pay it off.
It is important to consult an elder lawyer in your state about how a reverse mortgage will impact your rights and eligibility for federal benefits.