Most seniors prefer to age in place and stay in their home as long as possible. If serious health problems and disabilities occur, it may be necessary to enter a senior facility or receive professional help from caregivers outside the family.
Depending on individual circumstances, one of the most effective ways to finance this care is through a reverse mortgage on the senior’s primary residence. A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. In many cases, seniors have built up substantial equity in their primary residence, which is the difference between the appraised value of the property and the mortgage balance. In effect the equity acts as the collateral for the loan. You do not have to repay the loan unless the borrower or co-borrower no longer lives in the residence or fails to meet its obligations such as taxes, maintenance, insurance, utilities, etc.
A reverse mortgage is different from a home equity line of credit in that no payments are necessary in a reverse mortgage. If a mortgage balance exists it is paid off and becomes part of the reverse mortgage. This can increase the cash you have available each month because you no longer have to make payments on your regular mortgage. When the house is sold, the bank takes its repayment of the loan with interest and the balance goes to the heirs of the borrowers. The borrower can never owe more than the value of the house. No debt is passed along to the estate or heirs.
Although other financial institutions offer reverse mortgages, the most popular (95 percent) are offered by the Department of Housing and Urban Development (HUD) and are insured by the Federal Housing Administration. Because it is a federal loan there are many safeguards in place to protect senior homeowners. The loan is called a Home Equity Conversion Mortgage (HECM). There are no income requirements, no credit scores to meet, or monthly payments required. The borrower can elect to receive payments as a lump sum, setup monthly payments or in the form of a credit line to withdraw funds as needed. The loan proceeds are not taxable.
In order to qualify you have to be at least 62 years of age, live in your primary home, and first meet with a government approved reverse mortgage counselor before the application can be processed. A number of factors determine how much money you can borrow. Some of these include the value of the home, the balance of the existing mortgage, the type of loan, the current interest rate and the age of the youngest home owner.
There are some disadvantages to a reverse mortgage. Closing costs will be approximately the same as any FHA loan although they can be included in the reverse mortgage. Since no monthly payment is required, the mortgage balance will continue to increase over the life of the loan. Your home may increase in value from year to year but your mortgage balance is increasing as well. When you use all or a portion of the equity in your home you will have less to leave as an inheritance for your family.
Reverse mortgages are not for everyone. It’s critical that seniors and their families get unbiased counseling and information when considering whether to tap into their biggest asset. In addition to consulting with friends, your lawyer and accountant, help is available from a Home Equity Conversion Mortgage counseling representative by calling 1-800-569-4287. An approved lender can be found at www.hud.gov.