In the United States, the housing wealth of homeowners aged 62 or older has reached an all-time record of $7.70 trillion, and in Canada the situation is similar. This, coupled with interest rates being at all-time lows, has created an unprecedented opportunity for seniors to benefit via reverse mortgages. Indeed, a quick check online regarding how much cash you could qualify for may very well leave you in shock!
No matter how much your home is worth, only cash can take care of your taxes and day-to-day expenses as a senior. As a result, many retirees are “house rich” but “cash poor”, and may benefit from turning their equity into cash they can use on living expenses, retirement investing, gifts to family or charity, or any number of other uses.
A reverse mortgage is one of the most popular ways to “monetize” your home’s equity in this regard. Find out more below!
What Is Reverse Mortgage?
In a reverse mortgage, the borrower – you – takes out a loan against the equity in your home. Essentially, a reverse mortgage allows you to convert part of your home’s equity into cash without having to sell it . Your home serves as collateral in a reverse mortgage.
After you borrow a reverse mortgage loan, you will receive proceeds in one of the following ways :
- A lump sum.
- Equal monthly payments.
- Term payments (equal monthly payments for a set period, e.g. 10 years).
- Line of credit.
- Equal monthly payments and line of credit.
- Term payments and line of credit.
Regardless of what you choose, reverse mortgages accumulate interest over time, which will eventually be repaid.
You will not have to repay the loan until the last surviving borrower either :
- Sells their home.
- No longer lives in the home for consecutive 12 months. This could happen if the borrower, for example, moves to a nursing home.
However, until any of this happens, you are required to:
- Pay property taxes.
- Pay homeowner’s insurance.
- Keep your home in good condition.
This is to ensure that you can pay off the loan when the time comes. If you fail to meet these requirements, the lender may demand that you pay the outstanding debt early.
Federal regulations require that the loan amount not exceed the home’s value. Even if it does, then you or your estate will not be responsible for paying the differences.
The money you get with a reverse mortgage is also usually not taxable. However, interest is not tax-deductible each year – until the loan is either partially or fully paid off.
With all that in mind, a reverse mortgage has many similarities with traditional mortgages and loans. However:
- Unlike traditional mortgages, you don’t make monthly mortgage payments. Instead, the lender makes payments to you.
- Unlike loans, you receive proceeds over time and only have to pay off the loan when the last surviving borrower dies, moves out for a long time, or sells the house. So you owe more as time goes on.
Reverse mortgages can thus be more cost-effective in certain situations, but you will have to do more research to determine if they are truly for you.
Types Of Reverse Mortgages
There are three types of reverse mortgages:
- Single-purpose reverse mortgages. These are the most affordable but only allow you to use the loan for a purpose specified by the lender – for example, repairs or property taxes.
- Proprietary reverse mortgages. These are private loans that are typically borrowed by owners of high-value homes.
- Home Equity Conversion Mortgages (HECMs). HECMs are federally-insured and are backed by the United States Department of Housing and Urban Development. These reverse mortgages may be used for any purpose.
HECMs are the most popular type of reverse mortgage and are available to seniors aged 62 or more . Most of the details mentioned in this article apply to HECMs – the terms of the two other forms of reverse mortgage may be different.
Before applying for a HECM, borrowers are required to consult a counselor from an independent, government-approved housing counseling agency. The counselor must introduce you to the costs of the loan and its long-term financial implications. Additionally, the counselor must explain possible alternatives to HECMs.
How Can Reverse Mortgage Help Seniors?
Reverse mortgages could serve as a great source of cash for seniors whose net worth lies mostly in the value of their home. If you have no cash for satisfying your financial needs, a reverse mortgage would allow you to use your home to take out a loan.
Reverse mortgages have a big advantage over traditional loans – you don’t have to pay off the loan until you die, permanently move out, or sell your home. Although you do have to pay property tax and homeowner’s insurance, a reverse mortgage isn’t as financially burdening as other types of loans.
However, reverse mortgages have their own challenges. Most importantly, the longer you own the property after borrowing the loan, the more you will owe. Reverse mortgages are tightly regulated by local governments too, so understanding the law behind them is crucial.
With that, before taking out a reverse mortgage loan, weigh your options, assess your financial situation, and consult a government-approved counselor.
“Senior Housing Wealth Reaches Record $7.70 Trillion”, PR Newswire, https://www.prnewswire.com/news-releases/senior-housing-wealth-reaches-record-7-70-trillion-301154029.html.
“Reverse Mortgages”, U.S. Federal Trade Commission, https://www.consumer.ftc.gov/articles/0192-reverse-mortgages.
“Reverse Mortgage”, Investopedia, https://www.investopedia.com/mortgage/reverse-mortgage/.
“When do I have to pay back a reverse mortgage loan?”, U.S. Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/when-do-i-have-to-pay-back-a-reverse-mortgage-loan-en-236/.
“What is a reverse mortgage?”, U.S. Consumer Financial Protection Bureau, https://www.consumerfinance.gov/ask-cfpb/what-is-a-reverse-mortgage-en-224/.