Reverse Mortgages Basics

Reverse mortgages are loans against your home that require no repayment for as long as you live there. As opposed to regular mortgage loans, reverse mortgages have no income requirements and are based solely on the equity of your home or condo. There are no monthly payments to make as the mortgage is due only when the borrower is no longer living at the residence.

Seniors over the age of 62 are eligible for reverse mortgages in the US, provided they own their own single family dwelling. No health requirements need to be met, nor is there any loss of government benefits such Social Security and Medicare as a result of obtaining a reverse mortgage. Some benefits, however, such as Supplemental Security Income (SSI) and Medicaid can be reduced under specific circumstances. Tax liability for monies received through a reverse mortgage are a non-issue, as loan advancements are not taxed, although interest on the loan is consequently not tax deductible.

There are no income requirements to qualify for a reverse mortgage. You may be eligible for a reverse mortgage even if you still owe money on an existing mortgage. The reverse mortgage loan must be large enough reverse mortgage to pay off the existing loan entirely, however.

The benefits of a reverse mortgage are many, and include increased cash flow at a time when many are on a fixed income, putting the equity of your home to use and the ability to choose the method by which you are paid. Several installment options exist to help seniors structure their advances to fit their budgetary concerns and cash flow needs, affording them the ability to effectively plan for their immediate and long term financial future.

Many seniors may feel that borrowing against their home, especially later in life, is a risky endeavor. Reverse mortgages hold little if any risk for the borrower, however, as seniors are not borrowing against future income. Since keeping up with monthly payments is not an issue with a reverse mortgage, the reality is that many who choose this type of mortgage are able to enjoy what they have worked all their lives for in their post retirement years.

A typical mortgage is created when a lender provides you with a lump sum amount of cash to purchase real estate. In consideration of this, you agree to repay the mortgage on a monthly basis for a defined time period at a particular interest rate. The length of the repayment period and interest rate, whether fixed or adjustable, set the monthly payment amount.

A reverse mortgage works in a similar way, but backwards. It is a fact that the baby boomer generation is moving into their retirement years. A high percentage own homes with significant amounts of equity in them. The problem, of course, is equity is a fixed asset, to wit, you can’t see it in your bank account. Traditionally, the best way to turn this hard asset into cash was to sell the property and move down to something cheaper. You then pocketed the difference in the form of cash.

Many people, however, are attached to their homes. A good portion of your life, including raising a family, may have occurred in your home and it is emotionally difficult to sell it. On top of that, tax issues may take a bite out of the cash you receive. Throw in the pure misery of attempting to move all of your valuables that have been accumulating for 15 or 30 years and selling your home starts to look like a dubious option at best.

Lenders being the ultimate capitalist, they have come up with a solution for this problem. The reverse mortgage. A reverse mortgage allows you to convert much of your equity into tax-free cash without having to take on a monthly payment obligation. You don’t have to sell the home, go through the moving process or make any monthly payments to a lender.

A reversed mortgage gets its name from the payment process. Unlike a traditional home loan, a reverse mortgage requires a lender to make payments to YOU! You can choose to receive the money as a monthly payment for the rest of your life, a lump sum payment or even as a credit line. Lump sums are not recommended since home equity is typically your biggest asset, one you should be very careful with.

The amount of a reverse mortgage is dependent on a number of factors. Your age, interest rates, the appraised value of the home, the equity in it and so on all are involved in determining your options.

For many people, reverse mortgage options are of great interest. The tax free aspect of the payments is certainly a benefit.