Every year thousands of senior homeowners are supplementing their retirement income with tax-free cash from the equity in their homes – using a reverse mortgage.
Dwindling savings and Social Security just aren't enough to cover expenses. So how, exactly, is the money being used? According to The Reverse Mortgage Times survey results from fall 2007, the top 10 reasons why senior homeowners take out a reverse mortgage include:
29% -- Pay off bills
14% -- Purchase long-term care/life insurance
14% -- Extra monthly income for everyday living expenses
13% -- Home repair or remodeling
10% -- Health care costs/Medical expenses/Prescription drugs
6% -- In-home care
6% -- Financial/Estate tax planning
4% -- Lifestyle enhancement/Travel/New car
2% -- Help family with education
2% -- Help family purchase a home
Know the Basics About Reverse Mortgages
While many seniors view the reverse mortgage as a financial safety net, it's always prudent to consult with a financial planner or a trusted adviser before taking out a reverse mortgage loan. To help you begin shifting through the basics, here are some common questions asked about today's reverse mortgage.
What Exactly Is a Reverse Mortgage?
A reverse mortgage allows senior homeowners, aged 62 and older, to convert their home equity into tax-free money without selling their home, without giving up title, and without making monthly mortgage payments. The loan only becomes due when the last borrower(s) permanently leaves the home.
Why Would a Senior Want to Go Deeper in Debt in Retirement?
Many think of home equity as a form of savings, much like an IRA or 401k plan. So, while a reverse mortgage is a form of debt, it can be used as a tool to access home equity savings that can be responsibly spent down to improve the quality of one’s retirement lifestyle. Key advantages include:
- You remain independent. A reverse mortgage allows you to remain in your home and retain home ownership.
- No monthly mortgage payments. You need not pay back the reverse mortgage loan nor make any monthly mortgage payments until you permanently move out of the home.
- Tax-free money. Because the money you receive from a reverse mortgage is not considered income, it is tax free and will not affect your Social Security or Medicare benefits.
How Is a Reverse Mortgage Different from a Home Equity Loan?
It’s true, both a reverse mortgage and a home equity loan use the equity you have built up in your home to provide you with readily available cash. They differ in that with a home equity loan you must make regular monthly payments of principal and interest. However, with a reverse mortgage you do not make any monthly mortgage payments for as long as you stay in the home.
Can My Current Income Influence My Ability to Get a Reverse Mortgage?
No. Since reverse mortgage borrowers need not make monthly repayments, there are no income qualifications.
Can Any Homeowner Get a Reverse Mortgage?
No. Here are the basic qualifications that must be met to be eligible for a reverse mortgage.
- You must be a homeowner and live in the home as your primary residence
- You must own the home outright or have a relatively small outstanding mortgage balance that can be paid off with the reverse mortgage proceeds
- All homeowners on the title must be at least 62 years old
- The home must be in generally good repair, meet FHA property standards or be able to be brought up to standards using the reverse mortgage loan proceeds.
Will it Impact My Social Security, Medicare or Tax Situation?
Money from a reverse mortgage is not considered income, and therefore will not affect your Social Security or Medicare benefits.
What Are the Costs and Fees?
Like most mortgage loans, expect to pay an application fee, origination fee, closing costs, insurance and a monthly service fee. Often, these costs are added to the principle, so there’s no immediate burden to the borrower.
When Does a Reverse Mortgage Loan Come Due?
When (a) the last surviving borrower passes away or sells the home; (b) all borrowers permanently move out of the home or fail to live in the home for 12 consecutive months.
Disclaimer: This article is general in nature and not mean as specific investment advice. Individuals should consult an advisor about the pros and cons of a Federally-insured and tax-free reverse mortgage for his or her specific situation.
