What Is a Reverse Mortgage?
A reverse mortgage, used most often by retirees, can be a great way to take advantage of the equity you have in your home and add a source of income. Of course, that income doesn’t come without a price — just like the name implies, you’re trading some of that equity you have back to a lender.
See if you’re eligible and if a reverse mortgage is the right financial decision for you.
Am I Eligible for a Reverse Mortgage?
Reverse mortgages are loans that are only available to a specific type of borrower. Here’s what makes someone eligible:
You must be at least 62 years old. In order to qualify, the first hurdle you’ll need to clear is the age requirement. Regardless of your home equity, financial status or other characteristics that might make you a good reverse mortgage borrower, you must be at least 62 years old to be eligible.
Your home needs to be in good shape. If your home is in need of major repairs, you may be denied a reverse mortgage. Lenders typically don’t want the funds you receive from your reverse mortgage to be used to make major repairs, and they’ll require an appraisal to confirm your home’s condition and value.
Your home must be your principal residence. That means you must be living in your home full-time. For example, if you’ve had recent health problems and are living in a nursing home or assisted living facility, your home is no longer considered your principal residence.
You should have at least 50 percent equity in your home. While it may vary between lenders, the rule of thumb typically states that you should have at least 50 percent equity in your home to qualify. As with any loan, you should shop around to find the best deal.
You have to be current on your insurance and taxes. Lenders will want to be up-to-date on your homeowners insurance and property taxes — and they’ll want assurance that you’ll keep paying them even as you give up equity in your home.
If your home is a multi-family, mobile, manufactured home or a condo, you’ll have to meet other standards. Standards may differ in different localities and will depend on the type of home you own.
How Does a Reverse Mortgage Work?
So you know that a reverse mortgage is an exchange of your home’s equity for cash — but how exactly do you get it? Here’s how:
Pick a way to receive your funds. There are multiple ways you can receive the proceeds from a reverse mortgage:
- Lump sum. You receive all of the proceeds at once and are free to use them as you see fit. How much you can receive, for all payment methods, will depend on how old you and any other borrowers on the reverse mortgage are and the amount of equity you have in your home.
- Monthly payments. For as long as you live in your home, you can choose to receive monthly payments of an amount you and your lender decide on.
- Term payments. You can choose to receive monthly payments for a number of years instead of until you move out of your home.
- Line of credit. With a line of credit extended to you in exchange for equity in your home, you’ll be able to control how much you take out on a day-to-day basis, and you’ll only pay interest on the amount you borrow.
Keep in mind that all payment options besides the lump sum are adjustable rate loans. However, the funds you receive are generally exempt from taxes, no matter the payment type.
The loan will be due when the borrower passes away, sells the home or moves into a different residence. Things can get tricky when there is another borrower on the reverse mortgage, especially if they’re not 62 years old or older. Most commonly, the home is sold when the loan comes due and the proceeds are used to pay the balance.
There are fees included. Taking out a reverse mortgage isn’t as simple as trading equity for cash straight up. As with almost every loan in the book, there are fees and closing costs involved. Speak with your financial advisor and go over your finances carefully before deciding to take out a reverse mortgage.
Is a Reverse Mortgage Right for Me?
If you’ve met all the requirements and are comfortable giving up equity in exchange for income, a reverse mortgage could be the right move for you. However, you should always discuss your financial situation with your family and financial advisor beforehand. Here are some reasons why a reverse mortgage isn’t the right move to make.
You live with someone else. If you live with someone else and you pass away, the loan will likely come due. Strict strategic planning is a must for anyone considering a reverse mortgage.
A reverse mortgage would also put anyone who lives in your home in an uncomfortable situation should you pass away. Federal laws will dictate how long that person can remain in the home and whether or not they will be responsible for paying the loan balance.
You plan on leaving your home to an heir. If you don’t want your home to be sold after you pass away, a reverse mortgage is a risky proposition. Whether it’s the home’s financial or sentimental value, you should prepare to have the home sold when you pass away or move to a different home to satisfy your due loan amount.
American Family Insurance agents are dedicated to protecting what matters most to you. And whether you’re still paying off your current mortgage or are taking advantage of a reverse mortgage, your agent can help you protect what matters most with homeowners insurance.