What is a Reverse Mortgage and Is It Right For You

A reverse mortgage is a loan against your home that you do not have to pay as long as you live there.  It can be paid to you all at once, as a regular monthly advance, or at time and in amounts that you choose.  You pay the money back plus interest when you die, sell your home, or permanently move out of your home.

Since you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your "equity") generally grows smaller. But you can never owe more than your home's value at the time the loan is repaid.

Reverse mortgage borrowers continue to own their homes. So you are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in full.

Eligibility

All owners of the home must apply for the reverse mortgage and sign the loan papers.  All borrowers must be at least 62 years of age for most reverse mortgages.  Owners generally must occupy the home as their principal residence (where they live the majority of the year).

Single-family one-unit dwellings, along with some condominiums, planned unit developments, and manufactured homes are eligible properties for all reverse mortgages.  Mobile homes and cooperatives are generally not eligible.

What You Pay

The lowest cost reverse mortgages are offered by state and local governments. They generally have low or no loan fees, and the interest rates are typically low or moderate as well.  Private sector reverse mortgages include a variety of costs.  An application fee usually includes the cost of an appraisal and a credit report.  Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee.  These costs generally can be paid with loan advances, meaning it is added to your loan balance (the amount you owe).

Considerations

Reverse mortgages may have tax consequences that affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner. The IRS does not consider loan advances to be income.  However, if you receive Social Security Income, Medicaid, or other public benefits, loan advances are counted as "liquid assets" if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in savings and checking accounts) are greater than these programs allow.