A reverse mortgage may be a good thing if a person is at least 62 years old or older and has equity in their home. Elderly people may need extra income, they may have medical bills to pay, or there may be other needs that would require extra cash or income. A reverse mortgage is a way for people to take out a portion of the home equity home in cash or income without having to have the home sold or pay any additional monthly bills.
In a regular mortgage, people pay a monthly amortized amount to the lender. The reverse mortgage pays the homeowner out of the equity in the home and it generally does not have to be paid back as long as the owners live in the home. When the owners eventually pass away, sell the home, or the home is no longer the primary residence.
Before people apply for a reverse mortgage they have to meet with a counselor from a government approved housing counseling organization The counselor will explain to the prospective borrowers the 3 different types of loans, their costs, the advantages and disadvantages.
The amount that can be borrowed for a reverse mortgage will depend upon several factors. The age of the borrower, the type of reverse mortgage being applied for, the home’s appraised value, and current rates of interest all factor in to the equation. A rule of thumb is that the older the person is, and the more equity that exists in the home, means the more money that can be obtained from the reverse mortgage.
Money received from a reverse mortgage is not taxable and generally will not have any effect on Medicare or Social Security amounts. The title of the home remains with the homeowner and no repayment is required as long as the person lives in the home. The loan is paid off when the last surviving borrower passes away, no longer lives in the home as their principal residence, or sells the home.
Property taxes, insurance, and utilities must still be paid and the condition of the home must be kept up, or the loan may become due. This is an important consideration when an elderly couple may be unable to carry out any of these duties.
Some people who facilitate a reverse mortgage may put pressure on the homeowners to purchase other products such as long term care insurance or annuities. There is no requirement to purchase any of these types of products.
In spite of all the potential annoying problems, the reverse mortgage can be a real blessing for older folks who need extra income. The equity is certainly not earning any interest, and the extra money each month might be just the thing necessary to really enjoy retirement.
A very positive factor is if the homeowner takes the money as an income, it will continue as long as the homeowner lives there, regardless of whether or not the total income received exceeds the value of the home. If the net value of the sale of the home exceeds the home’s value in an arms length transaction, the loan does not have to be repaid to the lender by the heirs or the homeowner..