Reverse mortgages are financial tools available to senior homeowners who need an extra income stream. Considered loan advances, reverse mortgages eliminate monthly mortgage payments as well as offer a variety of cash payments to the homeowner. Once in place, it is possible to get out of a reverse mortgage under certain conditions.
What Is a Reverse Mortgage?
A reverse mortgage is a loan against the equity in a home. In most instances, the proceeds from a reverse mortgage may be used for any reason. Designed to enable seniors to convert part of their homes' equity into cash without having to sell their homes, a reverse mortgage may be structured to pay the homeowner set monthly payments, pay a one-time lump sum to the homeowner or establish an equity line available to the homeowner as needed.
Who Can Qualify?
Homeowners who are aged 62 or over may qualify for a reverse mortgage if the home has an adequate amount of equity. Federally-backed reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), back the loans with a federal mortgage insurance that protects the homeowner in case the lender goes out of business. There are no minimum income requirements to qualify, but prospective homeowners must receive counseling from an independent third-party to ensure that they understand the details of a reverse mortgage and to learn about additional options. Homeowners of single-family homes, manufactured homes built after June of 1976, condominiums, two- to four-unit properties and town homes are eligible for a reverse mortgage.
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Downsides of a Reverse Mortgage
Reverse mortgage loans are tax-free, but the upfront costs can be more expensive than other types of mortgages because they are rising debt loans. Interest is compounded monthly and can increase significantly over time. In addition to the origination fees, closing costs and interest charges associated with any mortgage, monthly service fees apply to most reverse mortgages. The interest charged to a reverse mortgage is not deductible on annual income tax returns until the loan is paid off. The lender also receives a substantial portion of the homeowner's equity in exchange for the reverse mortgage.
How to Get Out
Homeowners can get out of a reverse mortgage if they no longer occupy the home as a principal residence and pay off the outstanding balance owed. The Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) restrict the amount of equity that a lender can offer a homeowner based on the property's location. The balance may be paid from selling the home or simply moving out and giving the home to the lender. Any amount in excess of the reverse mortgage balance that the lender receives from selling the home goes to the homeowner or to the homeowner's estate.