Reverse mortgages have been around since 1961 although it wasn’t until 1987 until Congress passed an FHA bill to insure these loans. Despite this long history, many seniors are hearing about reverse mortgages for the first time. This unique loan option is designed for seniors to unlock home equity and remain in their home. Unlike a standard loan, you can access your home equity as a line of credit or lump sum without monthly payments.
To qualify for a reverse mortgage, you must be at least 62 with a good amount of equity. With a reverse loan, you can remain in your home throughout retirement without repaying the loan. Your heirs will not be responsible for the debt with the choice to walk away or take out a new loan.
The main downside of reverse mortgage loans is they can be a bit confusing at first with unique qualifications and rules to consider. If you’re interested in unlocking the money in your home, your greatest investment, here’s why a reverse loan can be the ideal solution.
No Loan Payments
One of the biggest benefits of a reverse mortgage loan is you do not have monthly mortgage payments. The only payments you will need to worry about are property taxes, homeowner’s insurance, and routine maintenance costs for the home. This non-recourse loan does not require payment unless the borrower:
- Passes away
- Sells the home
- Leaves the home as their primary residence for more than 12 months. This usually happens when the borrower must move into a nursing facility
- Fails to pay property taxes and insurance
- Allows the property to fall into disrepair and cannot have repairs completed
This means you can remain in your home during retirement while enjoying a lump sum of money or a credit line to supplement Social Security and pension income.
While monthly payments are not necessary, some borrowers choose to make monthly contributions toward the loan balance. Paying just the interest, for example, keeps the amount of debt from growing. This can make it easier to pass the home on to heirs.
Heirs Aren’t Liable for the Debt
A reverse mortgage is a non-recourse loan. You will never owe more than the value of your home if you or your heirs decide to sell the home to repay the loan. This means you will never leave your heirs with debt from your loan.
If your heirs do want to keep the home, they can take out a new mortgage for 95% of the home’s appraised value or the balance of the reverse mortgage loan, whichever is lower.
Several Payment Options
When you request a reverse mortgage quote, you’ll see that there are several ways to receive your loan proceeds. You can choose the option that best fits your needs. The option you choose can affect how much you can receive from a reverse mortgage, though.
Proceeds Don’t Affect Social Security and Medicare
- Line of credit. This is the most popular option as you can access the money as needed. To access your equity, you only need to submit a written request to the servicer. The unused portion of your line of credit will continue to grow over time by considering that you are getting older (which increases how much you can borrow with a reverse mortgage) and that your home is growing in value.
- Term. With a term payment, you get fixed monthly payments for a specific period. You may wish to receive monthly payments to defer Social Security benefits for another 5 years, for example.
- Tenure. With this option, you will receive fixed monthly payments as long as you live in your home. Your monthly payments will remain the same, even if the balance of the loan exceeds your home’s value.
- Lump sum. To preserve your equity, you can take a lump sum of money with a reverse mortgage that’s lower than the amount you qualify for.
- Modified tenure/line of credit. You can receive a line of credit as well as fixed monthly payments as long as you stay in your house.
- Modified term/line of credit. This allows you to receive a line of credit with monthly payments for a specific period of time.
You do not need to pay taxes on the proceeds of your reverse mortgage because the money is considered a loan advance, not earned income. Because the proceeds aren’t considered income, a reverse mortgage is unlikely to affect your Medicare or Social Security benefits.
There is a flipside to this, however. The interest that accrues on the loan won’t be tax deductible until it’s paid. This isn’t much of a downside, though, because you do not need to make loan payments or pay the interest on the debt. The loan will only be due when you leave your home or pass away.
There is also an important rule to remember if you receive Medicaid or SSI. In these cases, your loan proceeds must be used immediately. If you do not, they can be considered an asset and affect eligibility.
It’s important to weigh these considerations before you request a reverse mortgage quote.
Use the Money for Anything
Unlike most bank loans which require that you use the money for a specific purpose, you can use the proceeds of your reverse mortgage for anything you like. Here are just some of the ways you may want to use your loan:
- Pay off your existing mortgage. Many seniors use a reverse mortgage to pay off the rest of their home loan with their equity. This can help you remain in your home with very few housing expenses.
- Remodel your home to accommodate aging in place. Your home may not be set up well for your needs as you age, but the money from your loan can change that. You may want to remodel your bathroom to be handicap-accessible, add a ramp to your home, or even install a stair elevator.
- Pay for health insurance before qualifying for Medicare at 65. Once you qualify, your loan proceeds can pay for your Part B and Part D costs.
- Pay for monthly expenses without letting go of other assets that can grow in value.
- Choose a line of credit that can grow and cover any unexpected expenses.
- Buy a new home with the proceeds of the loan to downsize and reduce your housing expenses.
- Create your own set aside to cover property taxes and homeowner’s insurance.
- Delay Social Security benefits so they can grow until you’re 70.
- Use money from the loan to travel or move.
Depending on how you use your loan, it can help you grow your investment strategy, cover unexpected costs, and plan for your future.
Use Proceeds to Delay Taking Social Security
The longer you delay taking Social Security benefits, the higher your benefit amount. When you delay receiving your retirement benefits after full retirement age, your benefit will continue to grow until you reach the age of 70, when you must begin taking benefits.
If you have significant equity in your home, a reverse mortgage loan can give you access to a lump sum of money or a line of credit that can supplement your savings or pension. This can help you delay taking Social Security while your benefit amount grows.
Qualifying Is Easier Than You Think
If you are 62 or older with sizable equity in your home, you probably qualify to request a reverse mortgage quote and access your equity without monthly payments. Your home will also need to qualify as a single-family home, condo, townhouse, 2 to 4-unit multifamily property, or manufactured home built after 1976. Here are the basic requirements to qualify for a reverse mortgage:
- You are at least 62 years old.
- Your home is your primary residence.
- You own your home without a mortgage or you can pay off the balance with the reverse mortgage proceeds.
- You have the financial capacity to pay mandatory obligations like property taxes and homeowner’s insurance. If you cannot, the lender can require that you establish a set aside from your loan proceeds.
- You must complete mandatory HUD-approved counseling before taking out a reverse mortgage.