Reverse Mortgage Basics: Using Your Home’s Equity to Supplement Your Retirement Income

Reverse mortgages are becoming more popular now than ever. The concept and practice was originated in the mid to late 1980’s. Not many lenders were dealing with them then. Now, there are several that have jumped into the originating and servicing reverse mortgages, including the FHA.

The Basic Concept

Senior citizens with a good deal of equity in their homes can receive payments from a mortgage. The borrowers need not make any payments out of pocket, as the up front loan costs, which are higher than forward mortgages, can be included as part of the loan. When the last person on the loan passes away, the total amount of debt on the home is due. That debt includes all that was paid to the home owners, all the fees, and the accrued interest.

The recipients of a reverse mortgage payment plan still own the house just as they would with a forward mortgage. The property taxes and home or hazard insurance have to be maintained. The dwelling has to be maintained to hold its value, just as a forward mortgage requires.

What Does It Take To Qualify?

Not much. Usually one has to be 62 years of age. There are no income or credit requirements. After all, homeowners aren’t making payments, they’re receiving them. The home has to be the borrowers’ primary residence. No vacation homes or rental units allowed. More lenders are allowing single units within multi-unit dwellings up to four units, and even condos now.

If there is a first mortgage still left on the home, it needs to be paid off completely. A reverse mortgage must be in first position, even if it acts as a credit line that can be drawn whenever needed. Heirs are not personally liable for paying off the loan, but the estate is. The lender wants the money, not the house.

How Much

This depends on the value of the home at the time of application and approval. It depends on how much may still be owed. By not requiring income or credit qualifications, a reverse mortgage is more like a “hard money” or equity loan. So 60% loan to value would be the maximum allowed for payment or payments to the homeowners.

Besides the amount of equity one has, age can be a factor for loan amounts. The older one is, the more one may be able to receive. The high loan costs and whatever current mortgage that has to be paid off takes away from what a senior citizen is allowed to obtain.

How A Reverse Mortgage Pays Out

The payments to the home owners can be monthly, one lump sum, or established as a line of credit that can be drawn at any time. Whatever is drawn out of the amount allowed is also accruing compound interest over the years. The payments you receive create a rising debt, falling equity scenario. So that rising debt, which includes interest and loan costs, cannot exceed the value of the home. At that point, there will be no more payments to home owners.

Comparing Available Options

AARP highly recommends the Home Equity Conversion Mortgage, or HECM. It has a feature that enables a credit line to grow with time. It is insured by FHA, which guarantees that lenders will meet their obligations. There are several private mortgage lenders issuing reverse mortgages as well. And it seems that some credit unions are getting involved. Getting comparative information may take time, but this is the way to get what is best for your situation.