Reverse Mortgages – Facts To Consider
The reverse mortgage was designed to help homeowners bridge their lives between work and retirement. This is why the reverse mortgage can be the right financial vehicle for older homeowners who still have a significant amount of equity in their home, 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 substantially reduce or eliminate their mortgage have been successful in qualifying 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 very important 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 home, which ever comes first.
Reverse Mortgage Loan Proceeds Tax Free
Perhaps 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 a form of cash advance pending the homeowner’s sale of the home. Notwithstanding, the IRS has the legal right to change its rulings and does so from time to time, so you would be wise to contact a tax professional to be sure the law you are relying on is still current.
Under the law, to qualify for a reverse mortgage the homeowner must be at least 62 years old. While there are no minimum income or credit requirements at this time, homeowners should bear in mind that the real estate market is still a very volatile place. This means the equity that you may have now, may not be there down the road. Without sufficient equity, the homeowner will not be able to qualify for a reverse mortgage.
Reverse Mortgage – Loan Processing Fees
Unreasonably high loan processing fees have become a real factor to consider when looking at the reverse mortgage option. Some of these origination fees can cost as much as a new car, albeit a small one. If you’re not careful, having a reverse mortgage can start to resemble the old 30-year home loan you finally paid off! In truth you are likely to have similar types of costs and expenses of home ownership but without the ownership.
Monthly Insurance Premiums
For reverse mortgages that are federally insured – which are nearly all of them – the borrower must also pay a monthly mortgage insurance premium. In a reverse mortgage, while the borrower does not actually make monthly payments, the principal, interest and fees accumulate on a monthly basis. The loan is then repaid when the borrower eventually sells the house, moves out or dies.
You might ask, why would the borrower need insurance under a reverse mortgage situation. The purpose of this type of insurance is to protect the lender in case their investment in your home equity ends-up being valued less than the amount that you borrowed. Essentially, the borrower gets to pay to insure that the lenders investment in the borrowers equity remains a secure one.
This is one of many reasons why retired homeowners need to carefully evaluate if a reverse mortgage is right for them. Be sure to shop around and ask as many questions as you can from your lender before you commit to a reverse mortgage.