Reverse Mortgages

What is a reverse mortgage?

A reverse mortgage is a loan against real property, created especially for seniors who are at least 62. While a traditional mortgage is paid off over its life and creates home equity, a reverse mortgage returns equity to the homeowner in the form of a line of credit, a lump sum, or regular monthly payments.

Usual reason for taking a reverse mortgage

The main reason for taking out a reverse mortgage is to supplement cash flow. Reverse mortgage proceeds are not taxable income; they must eventually be repaid. These funds, however, can significantly improve your quality of life.

Equity taken as a lump sum can end monthly mortgage payments by retiring a mortgage balance. Or it can be used to pay off consumer debt or medical bills. Ending monthly payments could significantly improve a senior's cash flow. Regular monthly payments can enhance your quality of life.

Reverse mortgage vs traditional mortgage

  • A reverse mortgage pays you--a traditional mortgage requires monthly payments.
  • There is no credit qualifying required for reverse mortgage loan approval--a traditional mortgage usually requires a strong credit history and a minimum credit score.
  • The youngest borrower taking a reverse mortgage must be at least 62 years old--a qualified adult of any age can take a traditional mortgage.
  • Paying off a reverse mortgage does not have to be done until the last borrower no longer lives in the house--a traditional mortgage's balance shrinks with each payment until it is extinguished.
  • A reverse mortgage requires the property offered as collateral to be owned free and clear or at least have significant equity--a traditional mortgage can be made with little or no down payment (equity).

Qualifying for a reverse mortgage

Qualifying for a reverse mortgage is much easier than qualifying for a traditional mortgage. Approval by a reverse mortgage lender is based on the youngest borrower's age, the amount of available home equity, and current interest rates. No borrower can have an open bankruptcy, but otherwise, credit is not considered. Income is not considered because there are no monthly mortgage payments to make.

Four ways to take reverse mortgage equity payments

There are four main ways that equity can be distributed to the senior home owner using a reverse mortgage: term, tenure, line of credit, and lump sum.

  • The term option provides regular monthly payments for a specific period of time. For example, you might receive $1,000 per month for 10 years.
  • The tenure option provides regular monthly payments for life. Because the reverse mortgage lender cannot know your exact life-span, these payments are calculated conservatively and will likely be much less than term payments.
  • The line of credit option can be the least expensive because only the equity used accrues interest charges. The line of credit can sit waiting in case of an emergency.
  • The lump sum distribution option dispenses the proceeds to the homeowner at closing. If you have a small mortgage balance requiring monthly payments, or credit card debt obligations, or medical bills, the lump sum option can relieve you of these payments.

Reverse mortgage counseling (requires for FHA reverse mortgages, or HECMs) can help you choose the best option for taking your proceeds.

Renee Morgan

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