By Melissa Sprouse Browne, Real Estate School of South Carolina
Having a home is one of the biggest financial commitments most of us ever make. And, it represents one of our biggest and often most overlooked sources of extra income. As we grow older and find expenses climbing and our incomes declining through retirement, there is another option available that could help seniors stay in their homes and maintain financial independence. It's called a reverse mortgage.
Reverse mortgages are becoming popular in America. The US Department of Housing and Urban Development (HUD) created one of the first. Many seniors utilize a reverse mortgage to supplement social security income, meet costly medical expenses or make necessary home improvements. Since your home is most likely your largest investment, it is important to gather all of the information you can about a reverse mortgage before deciding if one is right for you or someone in your family.
What is a reverse mortgage? It is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity built up over the years can be paid out to you for any use whatsoever. But, unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower no longer uses the home as his or her principle residence. To be eligible for a reverse mortgage, you must own your home (or have a small balance due that can be paid in full from the proceeds of the reverse mortgage closing) and be at least 62 years of age.
What's the difference between a reverse mortgage and a bank home equity loan? With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus your debt ratio to qualify for the loan, and you are obligated to monthly mortgage payments. The reverse mortgage is different because it pays you, and is available regardless of your current income. In fact, you are not required to have ANY income at all to qualify - home ownership is your qualification. The amount you may qualify to receive depends on factors such as your age, interest rates, other loan fees, and the appraised value of your home or FHA mortgage limits for your area, whichever is less. Basically, the more valuable your home is, the older you are, the lower the interest rate, the more you can receive. You don 't make payments, because the loan is not due as long as the house is your principle residence.
When you purchased your home, you most likely made a small down payment and borrowed the rest of the money needed to buy it. Then you paid back your traditional, "forward," mortgage every month over many years. During that time, your debt decreased and your equity increased. If you eventually made a final mortgage payment, then you owed nothing and your home equity equaled the value of your home.
With a reverse mortgage, you are taking the equity out in cash. So, your debt increases and your home equity decreases - the opposite of a traditional mortgage. However, there can be an exception to this process. If a home's value grows rapidly, your equity could increase as well. This possibility means that your equity would grow over time as your home's value grows.
How much of your available loan amount would you take as a lump sum, a credit line, or monthly advance? These questions are important to consider, especially if your home equity is one of your few financial assets. Very simply, the more equity you use now, the less you will have for later. Most reverse mortgage borrowers choose a credit line. The amount of leftover equity at the end of the credit line depends upon the size and timing of the cash advances a borrower requests during the life of the credit line.
Important Questions To Ask:
1. Can the lender take my home away if I outlive the loan? No. Nor is the loan due. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value.
2. Will I still have an estate that I can leave to my heirs? It depends. When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. Remember, a reverse mortgage is a lien just like a traditional mortgage, except repayment is only required when the last surviving borrower sells the house, moves away, or dies.
3. How do I receive my payments? Generally, you have five options from which to choose:
- Tenure: equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principle residence.
- Term: equal monthly payments for a fixed period of months.
- Line of Credit: unscheduled payments or in installments, at times and in amounts of the borrower's choosing until the line of credit is exhausted.
- Modified Tenure: combination of line of credit with monthly payments for as long as the borrower remains in the home.
- Modified Term: combination of line of credit with monthly payments for a fixed period of months selected by the borrower.