When Banks Pay You

Posted by Diane H. Blackwelder on 21 August 2009 | 0 Comments

Tags: Reverse Mortgages

Today, record numbers of consumers are using reverse mortgages to supplement their retirement income, pay off their existing mortgage, pay for health care expenses, make home modifications, or simply establish a cash reserve for emergencies.  Despite increased popularity, reverse mortgages are often misunderstood

What is a reverse mortgage?

In a nutshell, a reverse mortgage is the opposite of a conventional mortgage.  The lender makes payments to the homeowner instead of  the homeowner making payments to the lender.   A reverse mortgage enables homeowners to convert part of the equity in their home into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment.

To qualify, all borrowers must be at least 62 years of age, the home must be the primary residence, and, of course, there must be equity in your home.

How much money can I get?

The loan you receive depends on your age, the value of your home, the amount of equity and interest rates at the time of origination.  A calculator that can help estimate how much you could receive is available at http://www.reversemortgage.org/

Several options are available for receiving the money generated by a reverse mortgage:

• An upfront lump-sum payment
• Line of credit
• Fixed monthly payments
• A combination of monthly income and line of credit
  

The funds from a reverse mortgage are tax-free, and will not affect regular Social Security and Medicare benefits.

How is the loan repaid?

Repayment is triggered when the last surviving borrower moves out of the home, sells the home, or it passes to the estate.  In most cases, the lender is repaid with the proceeds from the sale of the house.  The balance due would be the amount borrowed or the market value, whichever is less.

Things to consider:

• Possible impact to Federal Programs:  Funds received count as an asset and could affect Medicaid benefits
• Potentially High Fees:  In some cases, fees could add up to more than 10% of the principal loan amount.
• Repayment Risk:  Should the borrower move from the home for more than 12 months for any reason, such as a long-term care facility, the balance would become due.

Resources for More Information

Federal Trade Commission:  Reverse Mortgages:  Get the Facts Before Cashing in on Your Home’s Equity

National Reverse Mortgage Lenders Association

AARP: Reverse Mortgages