Most people believe that reverse mortgages are a relatively new retirement planning instrument. The fact is, reverse mortgage options have been around since the 60s and in 1988, President Ronald Reagan signed the FHA Reverse Mortgage bill into law. The first FHA approved reverse mortgage was made in 1989 and since then, has only grown in popularity. With that in mind, a reverse mortgage primer is helpful to understand the ins and outs of the program.
What exactly is a reverse mortgage?
Typically, when we purchase a home, we borrow money. The longer we make payments on the home, and barring any housing value declines, the more equity we build in our home. With a reverse mortgage, we take equity out of our home and the amount we owe on the home increases. Basically, a reverse mortgage is an instrument used to access the home equity and we accumulate interest. Unlike a standard mortgage, reverse mortgages do not require the homeowner to make a monthly payment.
What are the limitations?
Obtaining a reverse mortgage, which is known as an HECM (Home Equity Conversion Mortgage) is a bit more complicated than obtaining a regular mortgage. Some of the requirements include:
- Age of homeowners - only those who are age 62 or older are eligible. If there are multiple borrowers, all must be over the age of 62.
- Property, value and payments - homes must be one to four family units and the borrower must live in the home. The home value is almost moot since the cap on the mortgage is 50 percent of the value or $625,000 whichever is less. Borrowers must have the financial ability to pay associated payments like insurance, taxes and any association fees.
- Other considerations - borrowers will have to prove they have made all tax and insurance payments on time. In addition, typical verification of other income, family assets and ability to meet living expenses will be verified. In spite of what some people think, credit will be verified.
- No federal debt - borrowers must not have any federal debt such as student loans outstanding or past taxes due.
What are the advantages to a reverse mortgage?
One of the primary advantages of a reverse mortgage is the ability to use the equity in your home tax-free. There are no restrictions on how you may use the funds; they may be used for living expenses, vacations or any other purpose. Your overall loan amount, after interest charges, can never exceed the total value of your home. You get to use the equity in your home as if you were selling it but you still get to live there.
Are there disadvantages to a reverse mortgage?
As with any type of financial instrument, there are always downsides. The primary downside is for those who have homes that are worth large amounts of money; since the maximum loan amount is $625,000 you may not be able to access your entire built-up equity. The other primary downside is your heirs will have to pay off the mortgage should you go into a nursing home or when you die.
A reverse mortgage can be very helpful in some situations. Not every person is a good candidate for this program, but in some cases, it can be a very valuable tool for debt consolidation, long-term retirement planning and estate planning. If you need help deciding if a reverse mortgage is right for you, contact the Law Offices of James C. Shields. We'll be more than happy to discuss all of the options available to you and help you decide if a reverse mortgage is right for your needs.