Reverse mortgages are worth a look for retirees with home equity

Retired people who have equity in their homes and need extra income might find that a reverse mortgage gives them more options.

Reverse mortgages are loans against the property that do not have to be paid back as long as the homeowner lives in the home. Many reverse mortgage programs and payment plans exist. The homeowner may choose a monthly payment, a line of credit, a lump-sum cash advance, or a combination of any of these. There are no monthly payments. The loan is paid back in one payment when the home is sold.

“Reverse mortgages are a way for older adults to receive money out of their home and be able to live in their home as long as they choose to,” says Valerie Begalle, a reverse mortgage specialist with MetLife Home Loans. “The FHA requirements to receive a reverse mortgage are that the homeowners be 62 or older and have equity in the home, and live in the home as a primary residence.”

The funds received in a reverse mortgage are considered proceeds of a loan; consequently, the funds are received tax-free. Reverse mortgages have no income qualifications, the borrowers retain title to the property, there are no restrictions on the use of the money received, and because reverse mortgages are federally insured, no debt will be left to the homeowners’ heirs or estate.

The responsibilities of the homeowners are to live in the home as their primary residence, keep the property in good repair, and remain current on real estate taxes and homeowners insurance.

“Many people have been told that a reverse mortgage is too expensive, but there are so many new programs with lower origination fees, no service fees, and even a purchase product, that folks can downsize from a larger home into a smaller more manageable home with no payment,” Begalle says.

Reverse mortgages are not for people whose priority is to leave their property to their children free and clear. The mortgages can affect the inheritance that children get from their parents, particularly if the children planned to inherit their parents’ home. Begalle says that if a reverse mortgage exists on a house, then upon the last parent’s death, the house would be sold, the reverse mortgage would be paid back to the lender, and any extra proceeds from the sale would be distributed to the heirs. The possibility of such a circumstance occurring should be discussed among family members before a decision is made about a reverse mortgage, Begalle says.

“On the flip side of that coin, reverse mortgages are all non-recourse loans – you or your heirs are guaranteed never to owe more than the value of the home,” Begalle says. “They are federally insured loans, which means if when the home is sold the homeowners owe more than what the house is worth, the insurance picks up the difference, and there is never any debt left to the heirs.”

“Also, if the children would like to obtain a mortgage to keep their parents’ home, they can do that,” Begalle says. “They simply get a loan for what is owed on the reverse mortgage and the home is theirs.”

Because some reverse mortgages are more expensive than other sources of financing, borrowers have to clearly understand the expected costs.  However, under the right circumstances, Begalle says, reverse mortgages can be an excellent way for older adults with equity in their home to tap that equity and remain living independently.

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