Unless you’re 62 years of age or older, you don’t need to worry about a reverse mortgage right now because it isn’t even an option for you. On the other hand, if you are a senior homeowner looking for a way to supplement your pension or just want to have some extra cash available, a reverse mortgage is something you may want to consider. Understanding how a reversible mortgage works will help you determine if it is a good option for you, either now or in your future.
It’s hard to imagine a lender actually making payments to you but, as crazy as it may seem, a reverse mortgage is exactly that. Homeowners age 62 and over may be eligible to turn part of their home equity into a steady stream of payments without having to make an extra mortgage payment or giving up the title on their home. Sounds pretty sweet, but as with any loan, you’ll have to eventually pay the money back – once you sell the place or it is sold after your death. The amount you owe can never exceed the total value of the home, but if it sells for more than you owe, you get to keep the difference.
There are three types of reverse mortgages, differentiated primarily by the lending institution. Single-purpose reverse mortgages are offered by state and local government agencies, as well as some nonprofit organizations, typically requiring less expensive up-front fees than the other types of reverse mortgages. The lender specifies a single purpose, such as home improvements, for issuing the money. The second type, a Home Equity Conversion Mortgage (HECM), which is issued by the U.S. Department of Housing and Urban Development, is also known as a federally-insured reverse mortgage. Obtaining a HECM requires you to meet with an approved counselor first to make sure you understand this type of reverse mortgage. The third type is a proprietary reverse mortgage, which is backed by the private institution that lends the money. Fees associated with HECMs and proprietary reverse mortgages are typically higher than those for the single-purpose variety.
While you may decide to obtain a reverse mortgage to supplement your retirement income, it isn’t considered actual income because you eventually have to pay it back. This means you don’t have to pay taxes on the money received from a reverse mortgage. Any interest accrued on a reverse mortgage can typically be deducted when it is paid back.
Pros and Cons
The benefits of a reverse mortgage are apparent in that the money is tax free and you don’t have to make payments as long as you are living in the home. It is an ideal way to supplement your income, particularly if your senior life is accompanied by additional medical and regular prescription costs. While it won’t interfere with your Social Security or Medicare benefits, income from a reverse mortgage may affect your eligibility for Medicaid. When you have a reverse mortgage you will still have expenses such as property taxes, insurance, and home maintenance. In addition, a reverse mortgage isn’t a good option if you plan on leaving your home free and clear to your kids.
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