How Does A Reverse Mortgage Work?
You faithfully mailed your monthly mortgage payments, and now you find yourself sitting on top of an equity gold mine—a gold mine just waiting for you to tap into it by learning how does a reverse mortgage works. Someday, when you are old and gray, you can bring all that equity back to your pocketbook boomerang-style. Learn how the reverse mortgage works so you can plan ahead for your golden years.
- Determine Your Eligibility. If you have yet to see a gray hair, don’t get your hopes up. You can only snag a reverse mortgage if you are 62 years or older, and that “equity gold mine” has to be the place you hang your hat. You can’t get a reverse mortgage on your vacation house; it has to be home sweet home.
- Do Some Soul Searching. Mom and dad used to ask you why you wanted extra allowance money, and now you have to ask yourself the same. If you need the reverse mortgage for house repairs, you will want a different type of loan than the guy who needs long-term retirement income because his 401k tanked.
- Learn the Three Types of Reverse Mortgage Loans. Single Purpose Reverse Mortgages offer the cheapest option, but they limit the money to, well, a single purpose—say, roof repairs or plumbing upgrades. Federally Insured Home Equity Conversion Mortgages will cost you, but you can use them however you wish. If you own a high-value home, a Proprietary Reverse Mortgage works best.
- Determine Your Equity. Your equity determines the maximum loan amount, so you need to know how much you built up over the years—and keep in mind that it might change if property values increase or decrease.
- Know the Consequences. Your reverse mortgage probably won't get you in the hole with the tax man, but it can keep you from getting public assistance—a real concern in your golden years.
- Consult Your Tax Expert. The reverse mortgage doesn’t come with the big, fat mortgage interest deductions you enjoyed on your income taxes all those years, so prepare for a hit to your tax bill.
- Find a Counselor. If you go for the Federally Insured Home Equity Conversion Mortgage, you need to find an FHA-approved counselor first. Visit the FHA site to find one in your area: https://entp.hud.gov/idapp/html/hecm_agency_look.cfm
- Apply For a Proprietary Reverse Mortgage. Call a trusted bank. Single-purpose reverse mortgages work differently, and you need to search the Elder Care website to find the right agency: http://www.eldercare.gov/Eldercare.NET/Public/Home.aspx For the Federally Insured Home Equity Conversion Mortgage, your counselor will help you find the right lender.
- Choose Your Payment Option. Reverse mortgage loans let you choose between a lump-sum payment or a line of credit—and you can change the option for a small fee.
- Sit Back and Roll in the Dough. During the life of the loan, you receive payments or get a lump sum from the mortgage lender—hence the name “reverse mortgage”—and you still own your house.
- Payback Time. When you die or move out, the loan comes due. That could mean your heirs have to sell the family home, so have a talk with the kids.
- No Sticking it to the Kids. Luckily, a reverse mortgage lender cannot require repayment in excess of the home’s value, so you can rest easy knowing you won’t stick a nasty debt to your kids.
Tip: Never pay anyone to help you find a lender. You can get the information from HUD for free: http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm
Warning: The FTC warns that some businesses try to dupe you into a reverse mortgage by making a slick sales presentation or fooling you into believing you must buy a product or service to get the loan—not true, so don't be a patsy.