What is a Reverse Mortgage and How Do They Work?

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By Bill Gassett Updated May 1, 2023


What is a Reverse Mortgage and How Do They Work?

Are you considering getting a reverse mortgage? Do you want to know how these loans for seniors work? A reverse mortgage is a loan whereby the lender pays you, unlike standard mortgages where you pay the lender.

With reverse mortgages, part of your home equity is converted into payments paid to you in advance with agreed-upon monthly or lump sum terms.

Additionally, you don’t need to pay any money to the lender so long as you live in the property. Therefore, you will not pay any loan until you leave the house or pass away.

There are different kinds of mortgages for seniors, including loans for seniors, single-purpose run by local government agencies, and nonprofits. The second type is propriety reverse mortgages which are private’s loans.

The third reverse mortgage type is the HECM which stands for Home Equity Conversion Mortgages or HECMs. These are the most common form of reverse mortgages.

The reverse mortgage may feel like free money, but it is a loan. Service fees, loan interest, and mortgage insurance are assessed and added to the loan balance. The total costs of the loan will add up quickly.

A reverse mortgage is the best loan for seniors aged 62 and above. Seniors can access their equity at a time when they may need it most.

The FHA loan program makes the best arrangements for reverse mortgages, offering consumer protections and following these guidelines.

The following are the requirements for you to qualify for mortgages for seniors:

  • Must be aged 62 years and above.
  • Be the primary residence living in the home
  • No federal debt as of date.
  • The home must adhere to all FHA requirements.

You can live in your house and receive the payment as long as you are alive, regardless of your payment type. You can never be forced to sell your property to pay the mortgage. No payments are made unless you are not living in that home.

Pros of Reverse Mortgages

Receive Regular Income For Retirement

You get regular income for the period you live and reside in your property as a primary residence and retirement. They are the perfect loan to have when buying into a retirement community.

Accessing funds is a significant benefit for retirees struggling with daily upkeep expenses.

According to FHA, your equity is considered if you have made a down payment of a good amount instead of owning the home immediately.

You can also arrange a line of credit to access the money as needed.

No Taxes on Your Income

Your income is not subject to taxes as IRS considers Loans for seniors as a loan and not regular income.

Therefore, it is not calculated in formulas used for income to affect your medical benefits or social security.

Not a Recourse Loan

Most retirees may worry if the home they reside in as mortgages for seniors loses value and can’t sell for what they owe.

FHA mortgage insurance does cover the difference between the home value and the sales price in such situations. The home must sell for 95% of the value appraised, and the price must be within government boundaries.

It is, therefore, wise to ensure that you have FHA insurance so that you are not forced to pay more than the home price.

No Forced Early Repayment

The repayment of loans for seniors is affected when you are not living in the house, selling it, or are no longer alive.

You must use the proceeds to pay off the loan balance if you sell your home. However, if you sell it for more than you owe, you can keep the difference and use it elsewhere.

You will likely pay yearly property taxes, insurance, and maintenance expenses. If you pass on, the next of kin or heirs must sell the home to get proceeds if they cannot pay the loan. They can use the proceeds to pay off the loan but pay at the current market value.

Cons of Reverse Mortgages

Must Be 62 or Older

You must be 62 years old to qualify for senior reverse mortgages. If your spouse is younger, the reverse mortgage process will be affected. You may have to wait until both of you attain the age requirement.

You can opt for non-FHA-insured Loans for seniors but are not assured of protection.

Extra Costs Involved With Reverse Mortgages

Some extra fees come along with mortgages for seniors, including:

The mortgage insurance fee is a 2% initial premium of the loan amount and a 0.5% annual outstanding loan balance.

  • Third-party charges depend on your lender to close the process.
  • An origination fee of almost $6,000, depending on the value of your mortgage.
  • FHA allows the lender to charge monthly service fees.
  • These fees can be added up to your loan hence reducing your income.

The Inability Of Inheritors to Keep The Home

If your home’s value cannot pay off your loan, it may be hard for your heirs to pay it off if they don’t have other resources. It will have to be sold instead of keeping it.

It is essential to know how to sell an inherited house with a mortgage attached to it. Many people in real estate consider it wise to have a way to have it paid off when you pass on or at least have life insurance to clear any debts.

Long-Term Care at a Nursing Home

If you move to a nursing home for care for more than 12 months consecutively, your mortgages for seniors become due. It is considered as you are not your home as the primary residence.

Final Thoughts on Reverse Mortgages

A reverse mortgage is a perfect option for seniors in a financial pinch or who want an income stream. Be sure to work with a reputable lender when getting this loan. Also, be wary of reverse mortgage scams, as there have been plenty of them over the years.

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