For seniors who own their own homes and wish to continue living in their own place, reverse mortgages are a safe, powerful option. Through stock market dips, health care cost increases, or even if the cost of living is more than expected, a reverse mortgage can ensure the golden years are indeed golden.
A reverse mortgage allows homeowners age 62 years or older to exchange some home equity and turn it in to cash without ever making a monthly mortgage payment. The loan is repaid only after the last surviving borrower sells, moves out permanently or passes away.
Demystifying the reverse mortgage
Homeowners can use the money from a reverse mortgage any way they wish: pay off an existing mortgage, increase monthly income, make home improvements, age in place, pay health care or in-home care costs, travel or simply as a reserve for unexpected expenses. Reverse mortgages can also let people retire sooner.
The homeowner can receive the money in a lump sum, a line of credit or monthly payments for as long as he or she resides in the property (called tenure payments), in higher monthly payments for a fixed period of time (term payments) or in some combination of the two. The reverse mortgage program was intentionally created with a high degree of payment flexibility, and the money received from a reverse mortgage is tax-free. What’s more, a reverse mortgage qualifies on age and equity only, so the qualification process is very straightforward.
Recently, a Sonoma County resident was facing foreclosure on her primary home as well as on an investment property. The homeowner didn’t qualify for a regular mortgage loan or a home equity line of credit. She didn’t want to sell the property, because it had been in her family for more than 70 years. A reverse mortgage was the perfect solution.
She used a reverse mortgage on her primary home to pay off her two current mortgages, which relieved her of monthly mortgage payments totaling $1,962. She was also able to pay off the approximately $24,500 delinquency on her investment home to stop the foreclosure. There was even money left over for needed improvements on her investment property and to restore the lost income that had led to her financial dilemma.
Protecting the homeowner
The Department of Housing and Urban Development (HUD) guarantees that cash advances from a reverse mortgage will always be available to the homeowner even if the lender becomes bankrupt or is otherwise unable to make payment to the homeowner. The FHA insurance that the homeowner buys at the loan’s inception makes this benefit possible. Today, under strict regulations from HUD, seniors can never lose their homes or be forced to move out because of a reverse mortgage.
Before receiving a reverse mortgage, homeowners must complete a HUD-approved counseling session either over the phone or in person. Unlike traditional mortgages, all reverse mortgage fees are regulated and capped, and the homeowner receives required upfront disclosures, including an amortization schedule that can predict future loan performance. With an FHA- insured reverse mortgage, the homeowners and their heirs are fully protected in the unlikely event that the reverse mortgage balance would exceed the value of the home. This non-recourse provision guarantees that neither the homeowners nor their heirs would ever be personally responsible for any shortfall.
Common myths
• The lender can take your home.
False: The homeowner retains full ownership and full responsibilities (including paying property taxes and homeowners insurance and maintaining the home). A reverse mortgage is just a loan and has no mechanism to seize your home for nonpayment.
• You can be thrown out of your home.
False: The homeowner can stay in the home until a loan maturity event occurs (which is when the last surviving borrower sells, moves out permanently or passes away).
• Your heirs will be against it.
False: Most family members just want to make sure their loved one isn’t getting taken advantage of, and once they understand the benefits and safeguards involved, most are pleasantly surprised.
• Only “cash poor” or desperate homeowners can benefit from a reverse mortgage.
False: Although some homeowners have a greater need than others for cash or additional monthly income, a reverse mortgage can also be an excellent financial or estate planning tool.
