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Reverse Mortgage

A reverse mortgage is a special type of loan for older homeowners. Money is borrowed by the homeowner using their home as collateral. The loan is repaid from proceeds of the house sale when the owner moves or passes away.

One advantage of a reverse mortgage is that the older homeowner receives some tax-free income without having to sell their home. The amount of money for which you are eligible depends on your age, the value of your home, interest rates, and the lending limit in your area if you are applying within a government program. Various types of homes are eligible. Some people decide to receive their money in a lump sum while others opt for a line of credit so that they can withdraw what they need for home repairs, health care, debt repayment, property taxes, vacations, etc.

With a reverse mortgage you pay interest on the money that you actually receive. Interest is usually variable and tied to an index (such as the one year Treasury bill) plus a margin of between one and three percentage points. Interest compounds until the loan is repaid.

You may be eligible for a reverse mortgage even if you already have a mortgage. Some people choose to pay off an existing mortgage with a reverse mortgage if they qualify for the full amount or part of it if they don’t. But, a reverse mortgage is not a loan and you cannot incur new debt with one.

There is a service fee attached to managing the account of a reverse mortgage. You don’t pay the fee – it is subtracted from the money that is available to you. Don’t worry about losing regular Social Security or Medicare benefits with a reverse mortgage, but, with Medicaid you should use the reverse mortgage funds within the same month you receive them; otherwise, they will count as an asset.

Before you apply for a reverse mortgage you should get counseling to make sure you understand reverse mortgages and are aware of your alternatives – in fact, counseling is a legal requirement for your own protection.