Reverse mortgages 101

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Reverse mortgages are a type of home loan that allow a homeowner to convert a portion of the equity in their home into cash, either as a line of credit, a lump sum or a monthly cash payment. Federal Housing Administration (FHA) data shows the number and value of reverse mortgages have increased since 2012, so with the increasing popularity of reverse mortgages in mind, here are some of the most important facts that interested homeowners should consider.

Who is eligible?

To be eligible for a reverse mortgage, you must be age 62 or older, own your home and live in it. Additionally, you must have a low mortgage balance and the financial resources to continue paying property taxes and insurance. How much you can borrow is dependent on factors such as your age, the type of reverse mortgage you select, the appraised value of your home and current interest rates.

Home Equity Conversion Mortgages (HECMs) have no income or medical requirement.

Before applying for an HECM and some proprietary reverse mortgages, you must meet with a government-approved, independent housing counselor. The counselor will explain the loan’s cost (including comparing the costs of different types of reverse mortgages), financial implications and possible alternatives. Call HUD at 800-569-4287 for a list of counselors, or go online to HUD.gov and search for “housing counselors.”

What are the features?

The payments from a reverse mortgage are not taxable, generally do not affect your Social Security or Medicare and do not require monthly repayments. It should also be noted that the interest on a reverse mortgage is not tax deductible until you partially or fully pay off the loan. You retain the title to your home, but you must repay the loan when the last surviving borrower dies, sells the home or no longer maintains the home as their primary residence. HECMs allow a borrower to live in a medical facility, including a nursing home, for up to 12 consecutive months before the loan must be repaid. The amount you owe grows over time and can use up all or some of the equity in your home, leaving fewer assets for you and your heirs.

Is a reverse mortgage right for me?

The Federal Trade Commission cautions, “If you don’t understand the cost or features of a reverse mortgage or any other product offered to you — or if there is pressure or urgency to complete the deal — walk away and take your business elsewhere.” Since the fees and interest charges accrue quickly, reverse mortgages rarely make sense for someone who intends to sell his/her home later or wishes to pass the equity in his/her home along to heirs. Additionally, if you have a relationship with a financial planner, be sure to discuss how a reverse mortgage fits into your plan and if you can achieve your goals without one. If you do not have a relationship with a financial planner but are considering a reverse mortgage, this is the perfect opportunity to find a financial planner you trust and put their knowledge to work for you.

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