During retirement, homeowners do not have a regular income and may struggle financially. An option to help with a lack of cash flow is a reverse mortgage, where a homeowner who is 62 or older can withdraw portions of their home equity for cash. Instead of making regular mortgage payments, the homeowner instead can receive a monthly payment or as a lump sum. A reverse mortgage is typically used to cover expenses like debt consolidation, home improvements, or living expenses.
Taking out a reverse mortgage is a big decision that comes with various advantages and disadvantages. Before you talk with your mortgage provider, it’s important to know what you’re signing up for:
1. Who is eligible
To begin, the Federal Housing Administration (FHA) requires that homeowners be at least 62 years old. The home must not have any mortgage on the property, however, if it does, it may be paid in full with the proceeds of this mortgage. When applying for this mortgage, the credit score is not a factor. The homeowner retains title to the home as long as they live there and continue to pay property taxes, insurance, and household maintenance fees.
This type of non-typical mortgage does not require monthly payments. Instead of making payments, the mortgage company will make payments to the borrower. The buyer may receive the payments via lump sum or monthly, whichever they choose. Also, this mortgage has significant senior’s tax breaks. Payments are not taxable as the payments are labeled as loan proceeds and not as income.
Each person listed on the deed seeking this type of mortgage must be at least 62 years old. The property that is the subject of the mortgage must be the homeowner’s primary residence; a vacation home would not be eligible as you must live in the home at least 183 days of the year. Also, homeowners must ensure that they keep their taxes and homeowner’s insurance paid on time. This type of loan reduces the equity of a home and comes with fees that can cost thousands of dollars. Unlike other mortgages, this mortgage must be the only lien against the property.
Overall, the reverse mortgage can be a good or bad decision depending on the borrower’s needs. Whether to pursue this type of mortgage for whatever reason is worth researching if this decision comes to mind. This discussion is worth having with your mortgage banker to find out their thoughts and what works best for you, the borrower.