Reverse Mortgages: A Worry Free Financial Solution for Seniors?

April 23, 2015

With the housing market recovering to pre-bust prices, and properties no longer underwater, seniors can once again look to reverse mortgages to allow them to stay in their homes longer, while being able to tap into equity to bring in extra money.

A reverse mortgage is a special type of home loan that lets homeowners convert a portion of the equity in a home into cash. This means that, unlike traditional mortgages, there is no monthly principal and interest payment because you are the one who gets paid. Borrowers do not have to repay the loan until they no longer use the home as their principal residence or fail to meet the obligations of the mortgage. Many seniors use this type of loan to supplement Social Security income, meet unexpected medical expenses, make home improvements, and other needs. This may be an option for persons who are 62 and older and who use their homes as primary residences.

As with any other mortgage, there are certain drawbacks to reverse mortgages. For example, borrowers must keep their home in good repair, and pay property taxes and homeowners insurance.  However, if a borrower does not have enough money to pay these expenses, he could face foreclosure and lose the residential property. During the application process, lenders will assess the borrower’s ability to pay these expenses. Additionally, when the home is sold or no longer used as a primary residence, the cash, interest, and other finance charges must be repaid. Interest is charged on the outstanding balance and added to the amount owed every month so the total debt increases as the loan funds are advanced to the borrower. The result is that it reduces the chance of there being any assets left in the property to pass on to heirs.

Several factors control how much you can borrow, such as: the value of the home, the type of loan you select, and the current interest rate. Lenders will want the borrower to own the home outright or that there be a low mortgage balance that can be paid off at closing. The age of the youngest homeowner (that is the age of the youngest borrower or non-borrowing spouse) is also a factor for reverse mortgages. The condition of the home and property values in your area may also determine how much cash you can get. If the borrower has lived in the house for many years, it will have aged quite a lot and the house needs to be in good repair to qualify for a reverse mortgage.

Payment proceeds from the reverse mortgage that the borrower receives can be in the form of a lump sum, or a line of credit or a tenure payment plan (monthly payment to the borrower). Interest and financed closing costs, need not be repaid until the home is sold, as long as it is no longer used as the primary residence or the borrower dies. Proceeds are generally tax-free.

While this may be a good option for a senior homeowner, before making the decision to take a reverse mortgage, borrowers are encouraged to consider other options such as downsizing to a smaller place, moving in with a family member, taking a roommate, or even having an adult child purchase the house by making installment payments.