What is a Reverse Mortgage?
A reverse mortgage can help senior homeowners get the funds they need to plan for a more secure retirement. A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan (FHA). A reverse mortgage enables seniors to access a portion of their home’s equity to obtain tax free1 funds without having to make monthly mortgage payments.2
Some of the key eligibility requirements for a reverse mortgage include the following: the homeowner must be at least 62 or older, live in the home as their primary residence, have sufficient equity in their home, and must meet financial eligibility criteria as established by the Department of Housing and Urban Development (HUD). If you have an existing mortgage, then the balance would need to be paid off using the proceeds from the reverse mortgage. The borrower continues to own the home for the life of the loan and can sell the home at any time.
How Much Can You Get?
The amount of money you can receive is based on the age of the youngest borrower, current interest rates and the lesser of the appraised value of your home, sale price or the maximum lending limit.3 You can receive the loan proceeds in a lump sum, monthly payments or as a line of credit. The funds can be used any way you’d like4 such as for medical care, home repairs, unexpected expenses or you can simply save the money for a rainy day.
Repaying the Loan
The loan typically becomes due when the borrower moves out of the home as their primary residence or passes away. At that time, the borrower or their heirs can choose to repay the reverse mortgage loan and keep the house, or sell the home to repay the loan.
What Is a Caregiver Loan and How Does It Work?
If a reverse mortgage is not the right product for you, then you may want to consider an alternative option called a caregiver loan. This new product was launched earlier this year by a Massachusetts based lender called National Family Mortgage, LLC. “…The Caregiver Mortgage is an intra-family loan that allows family members to pool resources to provide a flexible line of credit that their aging relatives may be able to receive.” Family members can contribute any amount they want each month. For example, one child can contribute $500 each month, while another relative contributes $1,000. Since it’s an intra-family loan, there’s no bank or mortgage involved, but rather, the family members are the bank. The caregiver loan offers a lower interest rate than a reverse mortgage. Unlike a reverse mortgage, with the caregiver loan there’s no insurance premium, and no age or primary residence restriction. Family members are paid back once the parents pass away either by selling the home or by buying each other out. Although the lender does not actually lend the money themselves, “they handle the paperwork needed to assist with the loan being made between family members.”5
There are some potential disadvantages with this new product however, that would need to be addressed. For example, what happens if family members are suddenly unable to make their monthly contribution? Furthermore, what if a contributing family member passes away or the senior homeowner loses their home?5
Choosing the product that’s right for you really depends on your particular situation and your retirement goals. It’s also a good idea to discuss your options with a trusted financial advisor.
If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, please use our Reverse Mortgage Calculator or call 800-218-1415.
1 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
2 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
3 The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements.
4 You may need to set aside additional funds from loan proceeds to pay for taxes and insurance.
5 Forbes: Reverse Mortgages Vs. ‘Caregiver Loans’ – reversemortgagedaily.com, by Jason Oliva, 12/15/15, http://reversemortgagedaily.com/2015/12/15/forbes-reverse-mortgages-vs-caregiver-loans/.
Author: Meredith Manz