If you’re starting your estate plan, shopped around for mortgages, or even just watched daytime TV, chances are you have heard of a reverse mortgage, also called a Home Equity Conversion Mortgage. These are loans that allow a borrower to convert the equity in their home into a cash payment.
Some people use this financial tool for additional income, home improvements, medical expenses, or just as vacation or rainy-day money. The loans sound attractive, and may be for a lot of borrowers, but there are a five things you should know if you are considering a reverse mortgage.
- These loans are only available to borrowers age 62 and older who own and have equity in their homes. This means that the borrower should either own their home outright, free and clear of any liens, or the loan balance must be low enough to be paid off at closing from proceeds of the reverse mortgage. If the borrower has too high an existing loan balance with respect to the value of the home, then there will be no equity left to cash out in the reverse mortgage. In those cases, a borrower may be better off with a traditional refinance.
- There are no payments required to your lender on a reverse mortgage after the initial loan fees, but borrowers are still expected to pay taxes, insurance, and other charges as they come due. Repayment on a reverse mortgage is not triggered until the borrowers’ death or until the home is no longer used as a primary residence, so there are no monthly principal and interest payments to the lender. However, other costs of ownership must be maintained. This includes taxes and insurance, as well as homeowners association dues and other assessments.
- Upon the death of the borrowers’ or when they cease to use it as a primary residence, the entire amount borrowed, plus interest and fees must be repaid. In the event that children or other heirs wish to keep the property, they have the option of refinancing with a traditional mortgage or paying the loan off in cash. However, no debt is passed along to the estate or heirs. If they elect not to repay, the loan will be foreclosed.
- The amount of the reverse mortgage depends on a few factors, which includes the age of the youngest borrower or non-borrowing spouse, current interest rates, and the appraised value. Because the interest builds up over time, and repayment isn’t triggered until the borrowers’ death, the initial amount of the loan takes into account the life expectancy of those obligated on the loan. As a general rule, the older the borrowers, the more equity that can be drawn out early on.
- A borrower can elect how they wish to receive the proceeds from their loan. The term and number of distributions depends on the type of loan, type of interest rate, and lender, but proceeds can usually be distributed in a lump sum, over several months, or as a line of credit. However, a borrower has options about how the proceeds are received.
A reverse mortgage can be a great estate planning tool for many borrowers, and a source of extra or emergency income. If you are thinking about a reverse mortgage, be sure to contact an attorney to discuss your options.
Published by Emily Price on December 1, 2016