A reverse mortgage is a special type of home equity loan that is available to homeowners age 62 and older. You receive cash against the equity of your home without selling it. You can use the income from a reverse mortgage in almost any way you choose. Most people use them to close the gap between their retirement expenses and their retirement incomes. Some use a reverse mortgage as a resource to pay for medical care or buy long-term care insurance. Others use them to protect their assets or fund a life insurance policy.
You choose whether you want to receive a lump-sum payment, a monthly payment or a line of credit. The total amount that you can borrow is based primarily on the age of the youngest homeowner, the value of the home, the type of reverse mortgage you select and the current interest rate.
Unlike a traditional mortgage, a reverse mortgage does not require an income or credit history, and you make no monthly payments. Instead, the amount you owe, based on loan payouts and interest on the loan, increases over time. You do not have to repay the loan as long as you continue to live in the home. The loan becomes due when you or the last borrower (such as the remaining spouse) dies, sells the home or moves out of the home permanently. You or your heirs keep the difference if the home's selling price is greater than the reverse mortgage loan balance when it's time to repay the loan. Your heirs also can keep the home if they repay the loan balance.
Reverse mortgages include many important consumer protections:
- You continue to own your home and can never be forced to leave as long as you maintain the home and pay property taxes and homeowner's insurance.
- You must meet with a reverse mortgage counselor before your loan application can be processed or you incur any costs.
- You (or your heirs) will never owe more than the value of the home at the time you sell the home or repay the loan, even if the value of your home declines.
- Payouts you receive from a reverse mortgage are not taxable. They also do not affect your Social Security or Medicare benefits.
To determine if a reverse mortgage is right for you, consider how long you expect to stay in your home safely and practically. Will you be able to maintain your home? Do you have friends and neighbors nearby who can help if your ability to take care of your home and yourself declines? Is your neighborhood safe? Can your current home be adapted if your physical needs change?
A reverse mortgage usually has significant upfront costs. Therefore, if there is a good chance you will be moving out of the home soon (for example, because of a health problem) it is not a good idea to buy a reverse mortgage. Also, reverse mortgage funds must first be used to pay off any existing mortgage or other debt against the home, and to make required home repairs. These expenses can greatly reduce the amount of the loan available.
Sometimes a conventional home equity loan is a better option than a reverse mortgage, particularly if you are unsure how long you can continue to live at home.
Most people get a reverse mortgage through a traditional mortgage lender, like a bank. There are many reverse mortgage products available today, with different features, costs, and interest rate choices. As with any major purchase, it is best to shop around for the best deal. Study your options carefully before making any decisions.
The U.S. Department of Housing and Urban Development offers general information, links to lenders and calculators to determine if a reverse mortgage is right for you. To find a reverse mortgage counselor near you, call AARP's national reverse mortgage hotline at 1-800-209-8085.
The staff of Boomerang thanks the U.S. Department of Health and Human Services for contributing to this article.
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