This is where we answer the most common questions prospective customers might have. The number of reverse mortgage has peaked in recent years and is a hugely popular loan product for seniors. According to The National Reverse Mortgage Lenders Association (NRMLA), there were over 55,000 reverse mortgage loans originated in 2017 alone. The reason for the popularity of the loan may be the cost of living is on the rise and reverse mortgage loans offer seniors a tax free income for life without losing title to the home.
How does a reverse mortgage work? The term reverse mortgage is aptly named because the reverse indicates that instead of you paying the lender, the lender pays you. With a traditional mortgage you borrow money from the bank and pay the money back over time, using the house as collateral. With a reverse mortgage the lender gives you money based on the equity in the home and other factors, but you do not have to pay that money back in your lifetime.
Will the bank own my home? No! The title is all yours. The bank or lender will not own your home, nor have any rights. The lender will have a lien against the property, as they would in any other type of mortgage. Eventually when the mortgage is due (upon the death of the last remaining resident, the voluntary sale of the home, or moving out of the home for 12 months or more) the lender will want their money back. Remember the house is the lender’s collateral and is usually sold when the mortgage is due. At that point the banks get’s what is owed on the loan and the heirs get the remainder of the proceeds.
Isn’t a reverse mortgage prohibitively costly? This is a blanket statement and only true under certain circumstances. For example if you were to take out a reverse mortgage and sell the home within 3 years. If that was the case any prudent lender would advise against the loan, for the cost outweighing the benefit.
Will my heirs owe the bank? Reverse mortgages are known as non-recourse loans. This means that if under the circumstance where ore is owed on the loan than the home is worth, the maximum amount the heirs will owe is the value of the home at the time of repayment. The bank cannot come after anyone for the difference. The reverse mortgage loan does have to be paid back at some point though (as all loans do) whether by the borrower or heirs.
Is income from a reverse mortgage is taxable? Money, whether lump sum or monthly payments) is not taxable and will not affect social security or Medicare.
Will I need good credit and income to qualify? Not at all. There are no credit or income qualifying for a reverse mortgage. The basic qualifications are being age 62 or older, and the home is your primary residence!
Are reverse mortgages only for poor people? No. Affluent people are taking advantage as well because a reverse mortgage can be an excellent financial planning tool. This is why homes with values over up to $4,000,000 are a growing segment of the of the reverse mortgage business.
Do I have to own my home free and clear to get a reverse mortgage? No, you don’t. In fact many people get a reverse mortgage to free themselves of the financial burden of the mortgage! You do have to have sufficient equity in the home, but we will cover that in more detail later.
What are my reverse mortgage payment options?
- Fixed Monthly Payments: This offers you a monthly, tax free, income for life. In this instance a calculation will be made, based upon your age, interest rate, and the value of the house, as to how much tax-free income you will receive, for life, on a monthly basis. You can give us a call for this calculation. It takes no time at all.
- Lump Sum: You may take entire amount out all at one time. Again, amount is based upon age, value of home and interest rates.
- Line of Credit: Allows you to take money out at any time, and interest is accrued only on moneys taken out. This is a very popular option for reverse mortgage borrowers because it allows you to take money out on an “as needed basis”, and any unused portion of the line of credit actually accrues interest and grows.
- Combination: Most people choose a combination of two or all three methods of payout. The reason is simple; every human being has a unique situation that doesn’t necessarily fit neatly into just one of the payout options. For example, most people opt to take out a sizeable lump sum immediately and use the remainder as a line of credit. Therefore, they solve a financial issue up front, and their credit line grows as it earns interest. Income from a reverse mortgage may be used at your discretion.
Do I have to pay back the loan? The money will, of course, need to be paid back to the lender. But not until:
- The last person living in the home passes away
- You choose to sell the home
- You voluntarily leave the home and have vacated it for at least 12 months.
The best part is the money to repay the lender typically comes out of the actual sale of the property. As I’ve said before, either you or your family receives the additional proceeds from the sale – NOT THE BANK.