What is a Reverse Mortgage?
A reverse mortgage is available only to homeowners age 62 and older. In this type of loan, some of the existing equity in the home is paid out in either a line of credit, lump sum or multiple payments. No repayment is made on the loan until the home is sold, or the borrowers die or leave the home (e.g., into aged care). When that occurs the loan, including accrued interest, becomes due. Reverse mortgages can be either private or federally insured, such as the Home Equity Conversion Mortgage (HECM), which is backed by HUD.
Things to Consider:
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There is no such thing as a no cost loan, and a reverse mortgage does have costs that go with it. Origination fees, closing costs, servicing fees and even mortgage insurance premiums (for HECMs) are all possible costs to consider.
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With a reverse mortgage, you will still be responsible for costs related to the home such as utilities, property taxes and homeowner’s insurance. These must be maintained or the lender may require that the loan be paid early.
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Only borrowers will receive funds from a HECM. If one spouse is on the loan paperwork and the other is not, the spouse who is not on the paperwork will lose their ability to access funds from the loan if the borrower dies or moves out of the home. Depending on the situation, they may even lose their ability to continue living in the home.
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The biggest challenge for many in deciding whether or not get a reverse mortgage is the question of having an estate to leave for their heirs. Many reverse mortgages do have a “non-recourse” clause, which prevents the amount owed when the loan becomes due from exceeding the value of the home, which offers some protection to your heirs. However, getting a reverse mortgage does reduce the equity in your home. How much equity is left when the loan becomes due can vary dramatically from person to person.