I recently asked the readers of my online blog if they had any questions regarding real estate they would like answered. One of questions that came up was: “What is a Reverse Mortgage and how do they work?”
Wikipedia defines a reverse mortgage or home equity conversion mortgage (HECM) as a type of home loan for homeowners that are 62 years or older that requires no monthly mortgage payments where Borrowers are still responsible for property taxes and homeowner's insurance.
My question is how can you have a mortgage that you don’t make monthly payments on?
The U.S Department of Housing and Urban Development explains it like this: “The Home Equity Conversion Mortgage (HECM) is FHA's (Federal Housing Authority) reverse mortgage program, which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements and more. You can receive additional free information about reverse mortgages in general by contacting the National Council on Aging at (800) 510-0301.”
Things to consider if you are considering a Reverse Mortgage:
What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single-family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
What is the difference between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments. With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.
Will you have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
The take home?
Call the number and get the skinny. Make sure you read and understand the fine print, if you don’t understand or have a question about any part of it, get clarification before you sign anything. An older gentleman I knew used a Reverse Mortgage to pay for some medical costs for his first wife; who unfortunately ended up passing away. A few years later when he remarried he was asked to repay the entire amount as well as re-start his monthly mortgage payments when he moved in with his new wife. His Reverse Mortgage required him to live in the home as his primary residence until the line of equity had been repaid or the home had been sold and the debt satisfied; essentially leaving the couple paying three mortgage payments while they waited for his home to sell. The Real Estate industry in the Four Corners is full of Licensed Professionals who are here to help, and would value the opportunity to enable you make an educated decision.