You're retired, you own your own home, but the funds don't stretch the way they used to and suddenly you need more income. Maybe you need to fix the roof. Or your medical bills have increased. Or, simply, inflation has eroded your retirement fund.
Where's the money going to come from? You can sell your house for cash, but then, where do you live? A home equity loan may provide immediate cash, but that increases your monthly payments.
A reverse mortgage might be a solution. A reverse mortgage is a loan against the equity in the home that provides a tax-free lump sum or cash advances but requires no payments during the term of the loan. You can get a stream of payments for a term or for life, or a lump sum payment, or a line of credit, or a combination of these.
A reverse mortgage, like any mortgage, involves interest, closing costs and fees. However, the debt you accumulate on the loan is not payable until you die, sell your house or move. The title to the home remains in your name and you are still responsible for home insurance and upkeep. If you die before the sum of payments plus interest equals the equity in the house, your estate gets the difference. If you sell the house, the proceeds are used to pay back the loan.
The loan is a "non-recourse" loan, which means that no matter how high the loan balance grows, you or your heirs never owe more than the home's market value. If you live a long time and the sum of the payments plus interest exceed the equity in the house, the FHA or FNMA reimburses the bank for the excess, not the estate. When the last co-owner dies, the institution gets the house as payment for the loan. Your estate is never subject to payments to the bank.
To qualify, you must be 62 years old, own your home or condominium or at least have a mortgage small enough to be paid off at closing, and agree to accept mortgage counseling from a HUD-approved counseling agency. If two owners are involved, the age of the younger owner will prevail.
In addition to the equity you have in your home, the funds you are able receive from a reverse mortgage are determined by the interest rate charged on the borrowed money and the age of the younger spouse. Lower interest rates yield larger payments. Older age yields larger payments.
The IRS currently treats monies received from a reverse mortgage to be loan advances and not taxable income. The interest that accrues is not deductible until the loan and interest is repaid, which only occurs if the owner sells the house before death of the last owner.
There are three types of reverse mortgages available. The least expensive, that is with the lowest fees and typical interest rates, is the Single Purpose Reverse Mortgage. This type is usually available through state or local governments and is to be used for home repairs or property tax payments. With the exception of programs designed to defer yearly property tax payments, only a lump sum payment, designed to cover a specified expense, such as repairing the roof, is available.
The FHA offers the second type of reverse mortgage, the Home Equity Conversion Mortgage (HECM). You may choose a combination of a lump sum payment, periodic cash advances or regular, such as monthly, payments. You may borrow up to the value of the equity in your home or the home equity limit set for your county of residence by the Federal Housing Administration, whichever is lower. For Lancaster County, that limit is $144,336.
If your home is valued much higher than the home equity limit for your county, a third reverse mortgage option is available, a Proprietary Reverse Mortgage from a private lender, insured by Fannie Mae. Interest rates, closing costs and fees for this type loan are much higher than the HECM and should be considered only if the need for funds is higher than the home equity limit.
How does a reverse mortgage affect Medicaid and Medicare? Medicare and Social Security do not care about assets. On the other hand, Medicaid does look at your assets, including your home. Payments from a reverse mortgage may be considered as income and may effect Medicaid eligibility. States run their programs differently, so you are encouraged to check with your local Office of Aging for more information.
There are some very good reasons for using a reverse mortgage. These include paying off your present mortgage, catching up on back taxes, preventing foreclosure due to debt on your home, paying for long term care insurance, paying for in-home health care, updating a house to meet changing needs, and increasing monthly income to catch up with inflation.
However, there are also bad reasons for obtaining a reverse mortgage. These include getting a lump sum for reinvestment, getting money for a short term debt, helping a relative to start a new business, and helping a relative or friend get caught up on delinquent debts.
Reverse mortgages can be complicated. Before deciding to obtain one, do your homework. Visit the AARP website, www.aarp.com/revmort/, or write for their booklet on reverse mortgages.
Also see the Bacon/Wilson Update on Reverse Mortgages