Reverse Mortgages – A Tax Free Income For Senior Citizens
Reverse Mortgages – A Tax Free Income For Senior Citizens
Is a Reverse Mortgage the Golden Goose for Seniors?
When considering financial options for retirement, the concept of a reverse mortgage might seem too good to be true, and the adage "There Ain’t No Such Thing As A Free Lunch" (TANSTAAFL) might come to mind. However, for those aged 62 and over, a reverse mortgage could indeed be a valuable financial tool.
What is a Reverse Mortgage?
A reverse mortgage allows homeowners to convert part of their home equity into cash. Unlike traditional mortgages where you make monthly payments to the lender, a reverse mortgage involves the lender making payments to you. You do not need to repay the loan until you move out, sell the home, or pass away.
Eligibility Requirements
To qualify for a reverse mortgage, you must:
Be at least 62 years old.
Own your home and live in it as your primary residence.
Have sufficient equity in your home.
Meet with a HUD-approved housing counselor (for Home Equity Conversion Mortgages or HECMs).
Types of Reverse Mortgages
There are three main types of reverse mortgages:
Single-Purpose Reverse Mortgages:
Offered by: Some state and local government agencies and nonprofit organizations.
Usage: Funds can only be used for specific purposes, such as home repairs or property taxes.
Eligibility: Typically aimed at low- to moderate-income homeowners.
Availability: May not be available in all areas. Check with your county’s Department of Senior Services.
Home Equity Conversion Mortgage (HECM):
Insured by: The Federal Housing Administration (FHA).
Usage: Funds can be used for any purpose.
Counseling Required: You must meet with an independent HUD-approved counselor.
Benefits: Includes a nursing home clause allowing up to 12 months before repayment is required if you move into a medical facility.
Proprietary Reverse Mortgages:
Offered by: Private lenders.
Insured by: Not federally insured.
Usage: Funds can be used for any purpose, but upfront costs may be higher.
Flexibility: Often allows for higher loan amounts compared to HECMs.
Costs and Terms
The costs associated with reverse mortgages include:
Loan Origination Fees
Closing Costs
Insurance Premiums (for insured loans)
Service Fees
Under the federal Truth In Lending Act (TILA), lenders must disclose all costs and terms of the reverse mortgage clearly. This includes:
Annual Percentage Rate (APR)
Payment Terms
Credit Line Charges
Interest rates on reverse mortgages can be fixed or variable. Variable rates are tied to a financial index and can change over time.
Borrowing Options
With a reverse mortgage, you can choose from several payout options:
Tenure: Equal monthly payments as long as you live in the home.
Term: Equal monthly payments for a fixed period.
Line of Credit: Withdraw funds as needed.
Modified Tenure: Combination of line of credit and monthly payments.
Modified Term: Combination of line of credit and fixed monthly payments.
Impact on Heirs
If you pass away or move out of your home, the loan must be repaid. Typically, this is done by selling the home. Any remaining equity after repayment belongs to your heirs. The loan cannot be transferred to them.
Avoiding Scams
Be cautious of potential scams related to reverse mortgages.
Never Agree Over the Phone: Avoid agreeing to anything over the phone, especially with unsolicited calls.
Get Written Information: Always request written documentation and verify it.
Beware of Fees: No fees should be required to obtain information about reverse mortgages.
Resources for More Information
HUD: Call 1-888-466-3487 or visit HUD’s Reverse Mortgage Page
FTC: Call 1-877-382-4357 or visit FTC’s Credit Page
Final Thoughts
A reverse mortgage can be a useful financial tool for seniors who need to access their home equity without selling their property. However, it’s crucial to thoroughly understand the terms, costs, and implications before proceeding. Consulting with a financial advisor or tax professional can help ensure you make an informed decision that aligns with your financial goals and needs.
