Most of you have heard the term “reverse mortgage” before, but few people know what it actually entails.
Reverse mortgages can get a bad rap as a last resort option for the poor, but in many situations it can actually be a great retirement planning tool.
Here’s the skinny:
A reverse mortgage works works in the opposite way a “forward” or “regular” mortgage does. This means that eligible people can borrow money against the equity they have in their home.
Who Qualifies?
Homeowners over the age of 62 who have never defaulted with the government.
You can only do a reverse mortgage on your primary residence.
Why not just take out a second mortgage?
To qualify for a second mortgage borrowers must have sufficient income. Many retirees do not. Unlike a second mortgage where you borrow against your home, a reverse mortgage pays you, so there are no interest payments.
Are the proceeds of the reverse mortgage taxable?
No. The reverse mortgage is not considered a source of income, although you are still responsible for paying your property taxes and homeowners insurance.
What if I still owe money on the home?
That’s okay. As long as you have equity in the home you can borrow against that.
Here’s an example:
Your house is worth $200,000 and you owe $50,000. This means you have $150,000 available in equity.
What about my mortgage payments?
Because HECM is a government sponsored program designed specifically for seniors, the bank is not allowed to collect mortgage payments from someone currently in a reverse mortgage.
So does the bank own my home if I enter into a reverse mortgage?
No. You keep the title of your home.
Can the bank take my home when I die?
No. Your heirs will have the choice of paying off the reverse mortgage and keeping the home, or selling it and keeping the remaining equity from the sale.
ADDITIONAL RESOURCES:
More info about Reverse Mortgages from the Federal Trade Commission:
http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm
More about risks and how to know if you are a good candidate from the AARP:
http://www.aarp.org/money/credit-loans-debt/reverse_mortgages/
