You aren't alone if you're wondering what to know about reverse mortgages before buying or selling a home. Planning to meet your long or short-term financial needs is part of making a wise real estate transaction, and knowing how a reverse mortgage works can play a role in your final decision.
Here are the details on reverse mortgages, how they can benefit homeowners, and why you should consider this option before purchasing or listing a home.
A reverse mortgage is a loan contract explicitly made for homeowners 62 or older that provides a lump sum payment, a line of credit, or a monthly payment to a homeowner based on the equity in their property. Some FHA-approved lenders offer reverse mortgages to homeowners as young as 55.
A traditional and reverse mortgage uses a home's value as security for the loan, allowing the homeowner to retain the title. However, instead of paying a bank or lender each month to lower the loan balance, a reverse mortgage loan requires no repayment until the borrower stops living in the home.
The homeowner must maintain adequate insurance, keep property taxes and HOA dues up-to-date, and keep the home in good repair during the length of the reverse mortgage contract to avoid loan foreclosure.
The loan balance must be repaid when the homeowner quits living in the home, either to move or if they pass away. Some homeowners and heirs end up selling their homes to repay the reverse mortgage loan. Another creative way to pay off a reverse mortgage is by securing a home equity line of credit (HELOC) or home equity loan if you want the property to remain in the family. If you end up selling the home, here are some tips and tricks to make moving easier and the transition less stressful.
The most common reverse mortgage is a federally-insured Home Equity Conversion Mortgage (HECM). The fees for this loan are higher than other types, but they are easier to utilize because they do not have income or medical requirements and do not dictate where the loan monies go.
Local, state and nonprofit agencies offer less common Single-Purpose Reverse Mortgages with fewer fees. In addition, homeowners can use Proprietary Reverse Mortgages if their home appraises higher than the HUD limits for the HECM loan.
A reverse mortgage is an excellent way for older homeowners on a fixed budget to have an extra income stream to pay healthcare expenses, eliminate a traditional mortgage, or handle other financial burdens without needing to sell their homes. Having additional funds can allow retirees to travel or partake in more activities to enjoy their golden years fully.
Another benefit is the income or loan proceeds from a reverse mortgage aren't taxable by the IRS. It's even possible that if you remain in your home long enough, the reverse mortgage balance may rise above the fair market value of the initial contract. However, a reverse mortgage is a "non-recourse" financial product, which means the lender cannot make a claim against your assets or estate if such a scenario occurs.
Discussing what to know about reverse mortgages with your realtor can help you remain in your home instead of selling or ensure you buy an appreciating property you can plan to tap for cash in the future.
To qualify for most reverse mortgages, you must have at least 50 percent equity in your home. Reverse mortgages charge closing fees that immediately lower the equity in your home, which is why they are best for those who plan to remain in their home long-term and live in a region where property values consistently increase over time.