By Stewart McClure, Regional President
Some people view a reverse mortgage
as a valuable retirement planning tool. Others are more skeptical. It’s not surprising that there are definite, and often diverse, opinions on reverse mortgages. There is a lot of misinformation out there so how do you decide if a reverse mortgage is right for you? Read on.
What is a reverse mortgage?
With a traditional mortgage, you borrow money from a lender based upon the (appraised) value of the house, and then make regular payments to repay the loan over a period of time. With a reverse mortgage, you start with a home that is paid off, or nearly paid off. You mortgage the equity in your home so you receive regular payments from the lender. When the home is no longer your primary residence, the loan must be repaid.
Reverse mortgages were officially introduced in 1988 by the U.S. Department of Housing and Urban Development (HUD)
. Reverse mortgages gained popularity in states where there were large populations of senior citizens, namely Florida and Arizona. Now they are gaining popularity in other regions of the country, because people are staying in their primary residence longer due to rising retirement ages, changing attitudes about relocating in retirement and economic conditions that have negatively impacted retirement savings. Reverse mortgages can be a way for older adults to stay in their homes and receive income to cover living expenses.
Do you still own your home with a reverse mortgage?
There is a myth that the bank owns your home with a reverse mortgage. That’s simply not true. You still retain the title to your home. You simply need to repay the lender any cash you received from them via the reverse mortgage, plus interest and other fees. But the remaining equity in your home is yours—or your heirs.
What fees are associated with a reverse mortgage?
There are closing costs, mortgage insurance premiums and loan origination fees, just as with traditional loans. Recent changes to the reverse mortgage have reduced the mortgage insurance premiums for some programs to as low as .50 percent. That would mean a $2,000 premium on a $400,000 home.
In addition, with a reverse mortgage you must continue to pay your property taxes and home insurance. These will not automatically be paid by the lender, as they would through an escrow account with a traditional mortgage.
How are proceeds from a reverse mortgage received?
You can receive the money in any combination of the following:
How do you qualify for a reverse mortgage?
- A lump sum
- A line of credit
- Monthly payments for life
A few points to consider.
- You must be at least 62 years old.
- You must live in your home, and expect to stay there for the foreseeable future.
- The reverse mortgage must be the only lien on the property. All other loans must be paid off, or you must be able to pay them off at closing.
- You must be able to pay property taxes and insurance and maintain the home according to Federal Housing Administration (FHA) guidelines.
- You must be able and willing to meet with an HUD-approved reverse mortgage counselor either in person or on the phone. They will help you develop a budget to determine if this is the right choice for you. (Family members are welcome to be part of this meeting.)
- If you are a senior citizen with limited income and resources, you must complete a Benefits Checkup screening to alert you of public and private benefits programs that can provide financial assistance to help.
- Make sure that the money you will receive from the reverse mortgage is enough to cover your expenses. If you need more money than that, consider selling your home and moving to less expensive housing.
- If you want to leave your home to your heirs, your heirs will have to repay the loan in order to keep the house. If they don’t want the house, the government will ensure that the house sale will cover the loan repayment.
- The proceeds of a reverse mortgage generally are tax-free.*
- Finally, here’s a little known fact: You can use a reverse mortgage to purchase a home.
If you think a reverse mortgage might make sense for you, consult a financial professional. We anticipate a tightening of rules in 2014, possibly making it more difficult to secure a reverse mortgage, even for people who need it.
If you have additional questions, contact Jody Michael Tobia
. Reverse and conventional mortgages are offered through Lakeland Mortgage, a trade name of Sullivan Financial Services, Inc. and a wholly owned subsidiary of Lakeland Bank. Licensed by NJ Department of Banking and Insurance. Lender NMLS #204030. Equal Housing Lender.
*Consult your tax advisor.