Reverse Home Mortgages

Reverse Mortgages – Facts To Consider

The reverse mortgage called a Home Equity Conversion Mortgage, helps homeowners bridge their lives between work and retirement. The reverse mortgage can be the right financial vehicle for older homeowners who still have a significant amount of equity in their homes but are limited in their cash reserves and have no other ways to increase their income during their retirement years.

Homeowners who have been able to reduce or eliminate their mortgage substantially have successfully qualified for what is known as a reverse mortgage loan. Here is how the typical reverse mortgage works and why a reverse mortgage has been so popular in recent years.

What is a Reverse Mortgage?

In a reverse mortgage, a qualified homeowner can still live in their home even though they have technically given up ownership in exchange for a lump sum tax-free payment, which can be used for any purpose whatsoever with one significant caveat: the homeowner must pay off all of the homes underlying liens and mortgages with the cash proceeds received from the reverse mortgage loan when they die, leave or sell the house, whichever comes first.

Reverse Mortgage Loan Proceeds Are Tax-Free

The most attractive feature of reverse mortgages is that the loan proceeds are not treated as taxable income. The Internal Revenue Service considers the loan proceeds as cash advances pending the homeowner’s sale of the home.

Notwithstanding, under certain circumstances, you may have to pay capital gains if you make a profit of at least $250,000 if you’re single or $500,000 if you’re married. However, under some circumstances, you can deduct the interest you paid on the reverse mortgage loan. It would be best to consult a certified financial planner before obtaining a reverse mortgage.

Current consumer law requires the homeowner to be at least 62 to qualify for a reverse mortgage. While there are no minimum income or credit requirements other than not owing federal debt, such as back taxes or federal student loans, the homeowner should keep in mind that the real estate market can be volatile.

Remember, without having sufficient equity, the homeowner may not be able to qualify for a reverse mortgage.

Legal Requirements To Qualify For A Reverse Mortgage

According to an official 2022 Consumer Report from the U.S. Government Consumer Financial Protection Bureau, aside from the age requirement referenced above, other reverse mortgage requirements include:

• The home you are doing your reverse mortgage must be your principal residence. This means you reside there most of the time on an annual basis.
• You must either fully own your home outright or have an extremely low balance left on your mortgage.
• You must not have any outstanding federal debt, such as still owing federal income tax or federally insured student loans.
• At the close of your reverse mortgage, you must demonstrate that you have sufficient money to afford to pay taxes and insurance on the home. Sometimes these sorts of expenses are deducted from the reverse mortgage loan.
• The condition of your property must be in reasonably good repair.
• You must receive HECM-approved counseling to learn more about the process, including your eligibility for a reverse mortgage.

Reverse Mortgage – Loan Processing Fees

Unreasonably high loan processing fees have become a factor when considering the reverse mortgage option. If you’re not careful, having a reverse mortgage can start to resemble the traditional 30-year home loan you finally paid off.

Monthly Insurance Premiums

For reverse mortgages to be federally insured – which most are – the borrower must also pay a monthly mortgage insurance premium. In a reverse mortgage, while the borrower does not make monthly mortgage payments, the principal, interest, and fees accumulate monthly.

Should You Want To Sell The Home

The loan is repaid when the borrower sells the house, moves out, or dies.

You might ask why the borrower would need insurance under a reverse mortgage situation. One reason is to protect the lender if their investment in your home equity is valued less than the amount you borrowed. Essentially, the borrower ensures that the lender’s investment in the borrower’s equity remains secure.

Be A Responsible Consumer And Shop Around

If you are shopping for a reverse home mortgage, make sure you speak to several companies and ask as many questions as possible before making your final decision.

Locate A Reverse Mortgage Lender

For more information on reverse mortgages, consider connecting online with a Mortgage Lender and a Certified Financial Counselor.