What Are the Principles of a Reverse Mortgage?

By Contributing Writer

  • Overview

    What Are the Principles of a Reverse Mortgage?
    What Are the Principles of a Reverse Mortgage?
    As home prices have increased throughout the country, the reverse mortgage has become a popular way for older Americans to tap into the equity in their homes. A reverse mortgage allows seniors to receive a loan on their home equity that does not need to be repaid until the house is sold, so is does not require monthly payments. As with any large financial decision, it is important to consult your financial advisor or an approved housing counseling agency to determine if a reverse mortgage is the right option for you.
  • Seniors Only

    Have you ever wished you could spend the equity you have built up in your home? In a reverse mortgage, the bank or mortgage company gives you cash in exchange for an equivalent amount of your home equity. The loan does not need to be repaid until the house is sold or you move to another residence. While it may seem like an attractive option, this type of loan is only available to Americans aged 62 and older. The home must also be owned outright, according to AARP. If there is any debt remaining on the home, it must be paid off with the money provided by the reverse mortgage. The borrower has the option to take the loan in a lump sum or receive regular payments.
  • No Minimum Income

    One reason why reverse mortgages may be very attractive to seniors is because there are no minimum income limits to qualify. According to AARP, you don't necessarily even need to have any income in order to obtain a reverse mortgage. That is because the lender is repaid upon the sale of your house, so you do not have to pay any monthly payments, as you would with a conventional mortgage or loan.

  • Interest and Fees

    Just like with a conventional mortgage, you will have to pay interest on the money borrowed from the bank. So, when the home is sold or you move to another property, you will be responsible for repaying the principle amount and the interest out of the proceeds of the sale. Reverse mortgages offered by private banks also generate the same kind of fees that are associated with conventional mortgages or loans, including financing fees, closing costs and origination fees. However, it is possible to avoid high fees and charges by obtaining a reverse mortgage from a governmental entity, rather than a private mortgage bank. These government-sponsored loans typically have very low costs and may only be available for low-income individuals, according to AARP. You can find out if you qualify for one of these low-cost reverse mortgages offered by the government by contacting your local Area Agency on Aging at (800) 677-1116.
  • Tax Issues

    The U.S. Federal Trade Commission (FTC), a government organization that provides consumer information and protection on issues like reverse mortgages, maintains that proceeds from a reverse mortgage are not treated as taxable income and should not interfere with any governmental benefits you may receive, like Social Security. They do caution that reverse mortgages do not change the ownership status of the home. You remain the owner and are responsible for all upkeep and property taxes on your home.
  • Considerations

    Reverse mortgages have grown in popularity over the years, and some consumer advocates worry that seniors may not fully understand the advantages and disadvantages of a reverse mortgage. While it may seem great to be able to spend your home equity without making monthly payments, you should keep in mind that a reverse mortgage will decrease the equity you receive when you or your children sell your home. If you are counting on the equity in your house to fund your retirement or pay for nursing home care or funeral costs, for example, you should be careful when pursuing a reverse mortgage. The FTC recommends that all consumers consult a financial advisor to understand their options concerning reverse mortgages. The Department of Housing and Urban Development (HUD) also offers free counseling for seniors on reverse mortgage issues. Call (800) 569-4287 to find a HUD-approved counseling agency that can offer advice and tips on obtaining a reverse mortgage.
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