Reverse mortgages allow borrowers to convert the equity in their home into cash that is usually tax free* without the need for monthly mortgage payments. In a reverse mortgage, the loan is taken out against a senior’s home equity and repaid in one lump sum when the borrower leaves the home. The loan does require that borrowers continue to make payments on property taxes, insurance, and maintenance (ex: HOA fees, if applicable) but can help seniors gain financial independence from an increase in living expenses.
Some of the key advantages to a reverse mortgage include:
The ability to receive money from your home equity that is usually tax free.*
Payments are made to you from your accumulated property equity, which may enhance and extend your retirement. You have options on how to receive this money: lump sum, line of credit, or monthly payments. Please note that a line of credit may allow you to pay down the line if you want to have less cash and an increase in equity.
The assurance that you never owe more than the home is worth.⁺
When you move out of the home (whether by selling or death), neither your estate or its heirs are responsible to pay a deficit on the balance owed if your mortgage exceeds the value of your home. If your heirs choose to keep the home, they can purchase it for 95% of the currently appraised value.
The opportunity to eliminate monthly mortgage payments.
Reverse mortgages remove the requirement that you pay monthly payments during your lifetime as long as you live in your home, pay taxes and insurance, and maintain the home by paying HOA fees, if applicable.
The opportunity to delay Social Security payments and increase monthly income.*
Reverse mortgages can allow you to delay taking money out of your IRA and avoid penalties and/or taxes because the proceeds do not count toward your income. If you haven’t drawn from your Social Security account yet, you should consider discussing this option with a tax advisor or financial planner.
The chance to bridge the Medicare gap from 62 to 65.
Some borrowers feel the need to delay retirement until age 65 because they cannot afford their own health insurance before Medicare kicks in. But a reverse mortgage can help you avoid paying income tax on money drawn from your IRA or other accounts to help you keep your retirement plan in place without diminishing your current assets.*
The ability to pay for long-term care expenses.
A reverse mortgage may provide proceeds which can be used to purchase expensive but necessary long-term care insurance without losing your home in the process.
To be eligible for a reverse mortgage, borrowers must:
- Be 62 years or older
- Own their home and have equity in it
- Live in the home as a primary residence (6+ months per year)
- Live in a single-family home, 2- to 4-unit dwelling, or an FHA-approved condo
- Have adequate funds for a down payment, if purchasing a new home**
- Have the ability to pay taxes and insurance, though no specific credit score requirements exist
There are a few types of reverse mortgages to consider. A certified reverse mortgage specialist can help you select between:
Proprietary Reverse Mortgages
These are private loans backed by the companies who develop them.
Home Equity Conversion Mortgages (HECMs)
These are federally-insured loans back by the US Department of Housing and Urban Development (HUD) and enable you to withdraw home equity for use on any purpose. The amount you can borrow with a HECM reverse mortgage depends on factors like age, type of mortgage, home appraised value, current interest rates, and financial assessment of your ability to pay taxes and insurance.
Home Equity Conversion Mortgage for Purchase (H4P)
These are a sub-type of the HECM option backed by the FHA that enables seniors to purchase a new primary residence and obtain a reverse mortgage all in one transaction. An H4P may be right for you if you are able to use cash on hand to pay the difference between the HECM proceeds and the sale price plus closing costs of your new purchase. While not available in all areas, an H4P may allow you to:
- Build a new custom home
- Relocate to be closer to friend and family
- Purchase a home in a senior living community
- Downsize to a smaller home
- Purchase a primary residence more suitable for your needs
- Purchase a new home with better accessibility and modern amenities
* This information does not constitute tax or financial planning advice. Please contact a tax advisor or financial planner regarding your specific situation.
** Not available in all areas. Please contact a certified reverse mortgage planner for more details.
⁺ There are a few circumstances where the loan will mature and the balance becomes due and payable. The borrower is still responsible for paying taxes and insurance as well as maintenance fees (such as HOA fees, if applicable). Credit is subject to age, property, and limited debt qualifications. Program rates, fees, terms, and conditions are not available in all states and are subject to change.
Copyright ©2017 Fairway Independent Mortgage Corporation (“Fairway”) NMLS#2289. 4801 S. Biltmore Lane, Madison, WI 53718, 1-877-699-0353. All rights reserved. Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. Youngest borrower must be at least 62 years old. Your monthly reverse mortgage advances may affect your eligibility for some other programs. At the conclusion of the term of the reverse mortgage loan contract, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to you and you may need to sell or transfer the property to repay the proceeds of the reverse mortgage with interest from your assets. We will charge an origination fee, a mortgage insurance premium, closing costs or servicing fees for the reverse mortgage, all or any of which we will add to the balance of the reverse mortgage loan. The balance of the reverse mortgage loan grows over time and interest will be charged on the outstanding loan balance. You retain title to the property that is the subject of the reverse mortgage until you sell or transfer the property and you are therefore responsible for paying property taxes, insurance, and maintenance. Failing to pay these amounts may cause the reverse mortgage loan to become due immediately. Interest on reverse mortgage is not deductible to your income tax return until you repay all or part of the reverse mortgage loan.This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply.