Reverse Mortgages

With a reverse mortgage, homeowners borrow part of the equity they have in their property, and the principal and accrued interest are repaid only after they die or move out. Over time the owner's equity diminishes while the amount of the loan increases—the opposite of a traditional mortgage. Unless you fall behind on taxes or allow the house to slip into disrepair, the lender can't foreclose on the property, even if you live many years beyond expectations and the size of the debt surpasses the value of the house itself. In most cases, the proceeds of a reverse mortgage can be taken in a lump sum, an open line of credit, or as monthly payments.

Here are some of the requirements of the reverse mortgage program:

  • To qualify for a reverse mortgage, you must own your home.
  • The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging.
  • Because you keep the title to your home, you are responsible for taxes, repairs, and maintenance.
  • Depending on the reverse-mortgage plan you choose, your reverse mortgage becomes due, with interest, when you move, sell your home, die, or reach the end of the selected loan term.
  • The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually paid off by refinancing it into a forward mortgage (assuming the heirs are eligible) or with the proceeds from the sale of the home.
  • A real benefit of reverse mortgages is that borrowers can live in their homes as long as they like, even after they have completely exhausted their equity. Borrowers must do their best to maintain the value of the home with diligent upkeep.

How Payments are Received

Depending on the lender, borrowers can choose to receive monthly payments, a lump sum, a line of credit, or some combination.

TIP: The line of credit offers the most flexibility by allowing homeowners to write checks on their equity when needed up to the limit of the loan

A few reverse-mortgage programs guarantee monthly payments for life, even after the borrower no longer lives in the home.

You can request a loan advance at closing that is substantially larger than the rest of your payments.

Tax Rules

The reverse mortgage payments you receive are nontaxable. Reverse mortage payments do NOT affect your Social Security Supplemental Income benefits, as long as you spend them within the month you receive them. This rule is also true for Medicaid benefits in MOST states.

Interest on reverse mortgages are NOT deductible until you pay off your reverse mortgage debt.

Maximum Loan Amounts

Maximum loan amount limits are based on the value of the home, the borrower's age and life expectancy, the loan's interest rate, and the lender's policies. Maximums range (depending on the lender) from 50% to 75% of the home’s fair market value. The general rule is: The older the homeowner and the more valuable the home, the more money will be available.

 

 Example.  A 65-year-old homeowner with a home worth $150,000 would be able to get a $30,000 lump sum or line of credit. A 90-year-old homeowner with the same home could be eligible for as much as $94,000.

All reverse mortgages have non-recourse clauses, meaning the debt cannot be more than the home’s value. Thus, the lender seeks repayment from heirs, family members, or the borrower's income or other assets.