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Mortgages

Reverse Mortgage

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A reverse mortgage enables older homeowners (60+) to convert part of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Below are some common questions asked by consumers about reverse mortgages.

A reverse mortgage provides income that people can tap into for their retirement. The advantage of a reverse mortgage is that the borrowers credit is not relevant, and is often unchecked, because the borrower does not need to make any payments. Because the home serves as collateral, it must be sold in order to repay the mortgage when the borrower dies (in some cases, the heirs have the option of repaying the mortgage without selling the home).

These types of mortgages have large origination costs relative to other types of mortgages.  These costs become part of the initial loan balance and accrue interest. Senior citizen borrowers with good credit should carefully analyze the options of a more traditional mortgage, such as a home equity loan, against a reverse mortgage.

To be eligible for a reverse mortgage, the Federal Government requires that all homeowners be at least age 60. The home must be owned free and clear or all existing liens but be able to be satisfied with the reverse mortgage. If there is a mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at the closing.

Generally, there are no income or credit score requirements for a reverse mortgage. You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a 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 assistance from a family member or friend.

Disadvantages or pitfalls include the limits set by the governing body that prevents reverse mortgage lenders from giving you the full value of the house. There are also interest rates applicable and the closing costs are higher than that of regular mortgages but more lenders are starting to waive some of their fees. Additionally like all other programs, it eats up the equity of the home which leaves less inheritance. Further reverse mortgage information can be obtained from a counseling specialist.

Alex Tretjakov

The author Alex Tretjakov

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