A reverse mortgage can help seniors who live in the United States add to their income during retirement by borrowing from the equity in their home. Reverse mortgages have been around for decades. The first reverse mortgage was in 1961 by a Maine bank, Deering Savings & Loan. Homeowners can borrow up to their home’s appraised value not to exceed $417,000. When planning for retirement, seniors should review all reverse mortgage information at hand to make sure they know the rules and how to take advantage of all the benefits available
Eligibility Requirements
A reverse mortgage loan is available to seniors aged 62 or older. To obtain a reverse mortgage, the homeowner must live in the home, keep it in good repair, maintain homeowners insurance, and pay all taxes due on the property. The homeowner is allowed to be out of the home temporarily and still maintain the reverse mortgage, up to 364 days of unoccupancy. The property must be a single-family home, a condominium, or a 1- to 4-unit multiple family residence. Reverse mortgages have no minimum credit or income requirements since no payments are being made on the loan.
Payment Terms
Payments to homeowners from the lender on reverse mortgages can be made to the homeowner in a number of ways, including lump-sum payment, monthly payments, or a line of credit. No payment is due on a reverse mortgage until the homeowner dies, moves out of the home, or sells the home. When the mortgage becomes due, the heirs have an option to refinance the home, sell the home, or turn the home over to the lender. If the home goes back to the lender, the heirs will have no further claim to the equity in the property.
Tax Information
The Internal Revenue Service does not tax loan advances as income. However, portions of annuity may be taxable. Homeowners cannot deduct interest until they have actually paid it, which in the case of a reverse mortgage, would be at the end of the loan term. Mortgage insurance premiums are deductible on the 1040 long form.
Disclosure Requirements
Some lenders aggressively recruit seniors to attract the growing number of retirees wanting to take out a reverse mortgage on their homes. The Truth in Lending Act has certain disclosure requirements for reverse mortgages. The lender must provide full disclosure of credit terms and annual percentage rates. The finance charge, or the amount the loan will cost the lender over the life of the loan, must be stated in a dollar amount, as well as the total payments due. Borrowers must be presented with a disclosure statement three business days after the lender receives the loan application. Failure to disclose this information gives the borrower the right to rescind the loan.
Right of Rescission
If the lender does not disclose all the information required by the Truth in Lending Act, the borrower has three business days after closing to rescind the loan. The borrower must notify the lender by telegram, mail, or some other form of communication. After rescission, the lender must refund any money paid as a deposit or down payment. They have 20 days to refund this money to the borrower.
Advantages
A reverse mortgage can provide flexibility to seniors when planning for their retirement income. No restrictions are imposed as to how the money can be used. The homeowner does not have to fear the home being taken away for non-payment of mortgage nor does the lender have any claim to any other assets or income of the homeowner. Another advantage of a reverse mortgage is that borrowers can never owe more on their home than it is worth, even if the market value of the home declines after securing the reverse mortgage.
Disadvantages
One disadvantage of a reverse mortgage is the upfront cost of the loan. A reverse mortgage can cost as much as $8,000 for the homeowner in upfront fees. The loan also accrues compound interest. Because there are no monthly payments made, the accruing interest on the loan is the same as a loan advance. Calculated interest is on the principal amount of the loan as well as the interest already assessed to the loan. Because of this compounded interest, it is possible that the home’s equity will be depleted when the loan eventually becomes due. For someone who is planning to move in the near future, a reverse mortgage would not be a smart choice, as the loan becomes payable once the homeowner has moved. Additionally, if seniors plan to leave their home as an inheritance to their heirs, the reverse mortgage drastically reduces the home’s equity value.
Great overview of the reverse mortgage. I’d add that a borrower has the option of getting a fixed or adjustable interest rate. With the fixed rate their only option is to receive the funds in a lump sum. This means that they begin incurring interest on the entire amount from the day of closing which can eat up their home equity very quickly. Plus, this is at the higher (fixed) interest rate. In our free online reverse mortgage book we cover the good, the bad, and the ugly sides of reverse mortgages.