What is a reverse mortgage?
To qualify for a traditional mortgage, a lender checks your income to determine how much you can afford to pay back each month. Then, your lender finances the purchase of your home and you make monthly payments to the lender. The amount you owe on the loan decreases with each monthly repayment to the lender. With a reverse mortgage, you receive money from the lender and the loan is secured by your principal residence. Generally there are no monthly repayments as long as you live in your home, which is why you do not need an income to qualify for a reverse mortgage. The amount you owe on the loan increases each time you receive money from the lender, and interest is added to the outstanding loan balance. The loan is repaid when you sell your home, when you die or when the home is no longer your principal residence. If your home is sold and the lender is repaid, any money left over goes to you, your estate or your heirs.
Why do people get a reverse mortgage?
A reverse mortgage can help a homeowner stay in their home and convert part of the equity in their home into cash. Many seniors use reverse mortgages to meet financial obligations, finance home repairs or improvements or pay health-care expenses.
What costs are involved in a reverse mortgage?
Lenders generally charge closing and other fees for a reverse mortgage. Your total debt increases over time as loan funds are given to you and interest is charged on the balance. A reverse mortgage may have fixed or adjustable interest rates—an adjustable rate changes according to market conditions. A reverse mortgage would use up some or all of the equity in your home, leaving fewer assets or no assets for you and your heirs. You retain the title to your home, so you still have to pay property tax, insurance, utilities, repairs and other expenses. The interest on a reverse mortgage is not deductible on income tax returns until the loan is paid off in part or whole.
Should I get a reverse mortgage?
A reverse mortgage should be a last resort. For most people, their house is their largest asset. Keeping this financial safety net as long as possible is recommended. So you should be cautious and research your options before talking to a lender about a reverse mortgage. If you are considering a reverse mortgage as a way to remain living in your present home, compare that alternative to the idea of selling your home and using the proceeds to buy or rent a new home. If someone tries to sell you something like an annuity, and suggests that a reverse mortgage is an easy way to pay for it, be skeptical. It is important to fully understand what you are buying and the cost and implications of a reverse mortgage.
Jilenne Gunther, MSW, JD is the Legal Services Developer with the Utah State Division of Aging & Adult Services. This article should not be considered legal advice or financial planning advice . Consult your professional for such advice. This blog article is an excerpt from Navigating Your Rights: The Utah Legal Guide for Those 55 and Over, a publication from the Utah Division of Aging and Adult Services.