Reverse Mortgages: The Basics
You may have heard of a “reverse mortgage,” but what does the term really mean? Reverse mortgages allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. The money can be used to finance a home improvement, pay off a current mortgage, supplement retirement income or pay for healthcare expenses.
In a reverse mortgage, the money that you receive is only paid back when you die, sell your home, or no longer live there as your principal residence. Since reverse mortgages help homeowners stay in their homes, it is generally not used to finance a second home. However, if you needed cash for a second home, and you have sufficient equity in your first home, it is possible to look into a reverse mortgage on your first home.
Reverse mortgage qualifications
- You must be at least 62 years old
- You must be living in your home
- No income restrictions
Reverse mortage loan features
- The money from a reverse mortgage is usually tax-free
- A reverse mortgage does not affect Social Security or Medicare benefits
- You retain the title to your home
- You do not make monthly repayments
- The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence
As you consider a reverse mortgage, be aware that:
- There are generally higher origination fees and other closing costs
- There may be servicing fees during the term of the mortgage
- The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month.
- They may have fixed or variable rates, which change according to market conditions
- They use up all or some of the equity in your home, leaving fewer assets for you and your heirs
- You remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses
- Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole
Source: Federal Trade Commission
Resources: "Reverse Mortgages for Dummies," by Sarah Glendon Lyons and John E.Lucas (Wiley Publishing, Inc., Hoboken, NJ), $16.99, 249 pages.