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Until recently, there were only two ways to get money from the equity in your home. First, you can sell your home, but then you would have to move and most aging homeowners don’t want to move. Second, you could refinance your home, but then you would need to make monthly payments for the loan. These options should still be considered, but now there is another option.
A reverse mortgage is a way for seniors (62 and older) to release equity in their homes without needing to pay the loan back during their lifetime. The loan does not need to be paid back during the borrower’s lifetime unless the home is sold, refinanced or no longer used as the principal residence. Otherwise the principal and interest are paid when the last remaining borrower passes away. The debt can be settled by the heirs or by selling the home.
Reverse mortgages pay the borrower money in a lump sum, payments, a credit line or a combination of these options.
There are five primary factors which contribute to the size of the loans available:
1. The appraised value of the home (higher value = larger loan)
2. The current interest rate (lower rate = larger loan)
3. The age of the senior (older senior = larger loan)
4. Type of loan (credit line = larger loan, lump sum = smaller loan)
5. County property is located in (more expensive areas = higher loan limits)
The vast majority of mortgages are Home Equity Conversion Mortgages (HECMs) which are federally insured so they typically cost less.
An American Bar Association guide states that generally "the IRS does not consider loan advances to be income." The guide explains that if you receive SSI, Medicaid, or other public benefits, loan advances are counted as "liquid assets" if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in checking and savings accounts) are greater than these programs allow.
Before committing to a reverse mortgage, you may want to consider other options. Here is a list of options other than getting a reverse mortgage:
1. Intra-family loan
2. Sale-leaseback
3. Scaling down (moving to a less expensive home)
4. HELOC (less expensive up front costs)
Of course the type of mortgage depends on the needs and desires of the borrower. Contact us to discuss what options may work best for you.
Other Resources:
HUD Reverse Mortgage Portal
For government insured Home Equity Conversion Mortgages (HECMs)
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