After paying to live in your home for years, wouldn't it be nice if the home started paying you?
Reverse mortgages enable homeowners 62 and older to convert part of their home equity into tax-free income. The lender provides income to the homeowner in one of various forms, such as a lump sum or monthly payments. The most popular form is a line of credit, allowing the borrower to draw funds as needed.
To qualify for a reverse mortgage you must live in the home and if you are part of a married couple, the younger spouse must be at least 62 years of age. You must either own the home outright or have a low enough mortgage balance that it can be paid off at closing with the proceeds from the reverse loan. In other words, the lender must feel there's enough equity in the home to justify paying you, possibly in a stream of income, for the rest of your life.
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home. Generally, the more valuable your home is and the older you are, the lower the interest and the more you can borrow.
Make no mistake, with a reverse mortgage: you are a borrower. You are charged interest only on the proceeds you receive. Most reverse mortgages charge a variable interest rate as in an ARM or Adjustable Rate Mortgage. The interest compounds over the life of the loan until repayment occurs.
But unlike a traditional home equity loan or line of credit, a reverse mortgage doesn't require you to make payments. A reverse mortgage doesn't have to be repaid until you "no longer live there." That is, if you move out voluntarily, or you die. Either way, the lender is repaid with proceeds from the sale of the home. As long as you occupy the home, you must keep current on the taxes and insurance.
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. But the reverse mortgage must take on the first lien position, so any existing indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or with help from a family member or friend.
People who secure reverse mortgages generally do it for one reasonâ€”to generate income. So naturally, they're concerned about how the new source of cash might affect other income such as Social Security or Medicare.
Eligibility for those benefits is unaffected, according to the National Reverse Mortgage Lenders Association. What's different is Medicaid. Any reverse mortgage proceeds you receive must be used immediately, or in the same month. Funds you retain into the next month would count as an asset and could impact Medicaid eligibility.
My uncle says he wants to "die broke." He figures that's the way to make the most of his assets and his time on earth. I'm not sure I agree with that logic. After all, you can't time your exit, and if the "broke" part comes early, you have a problem. Still, I plan to tell him, if you're determined to "use up" your assets later in life, one good way to do so is to obtain a reverse mortgage.