What is a Reverse Mortgage?
A “reverse mortgage” is a financial tool available to people age 62 or above who own their own homes and would like to take advantage of their home equity to supplement their income. It is similar to a home equity loan, since the home owner is borrowing money based on the value of the home, except that the money is not paid back until the borrow dies or moves out of the home permanently and the home is sold. For a couple, the loan need not be paid back until both partners are no longer living in the home. The home owner may receive either a lump sum, a monthly income stream, or a line of credit. There is no limit on how long the borrower may remain living in the home. Thus, a reverse mortgage can be a great way for an older adult who has home equity, but whose monthly income is low, to get extra cash for living expenses, home modifications, or in-home services. Many older adults consider reverse mortgages as a method of meeting increased health care expenses, while others might use the proceeds to pay off an existing mortgage that has a higher interest rate.
Because the loan is based on home equity, many of the factors that prevent people from borrowing money in other situations—such as age, low income, lack of employment, or poor credit—do not stand in the way of obtaining a reverse mortgage. The best candidate for a reverse mortgage is a homeowner with significant home equity and who needs a major increase in long-term cash flow. Conversely, a homeowner whose equity is low, or who needs only a small loan, is probably not well-suited for a reverse mortgage. If the home is in very poor condition—for instance, needing repairs whose costs would exceed 15% of the home’s value—it may not be possible to get a reverse mortgage. Finally, if there is already an existing mortgage on the home, proceeds from the reverse mortgage must first be used to pay off that existing mortgage.
Reverse mortgage loans are made through private lenders but are insured by the federal government through the U.S. Department of Housing and Urban Development. A reverse mortgage lender is required to provide a borrower with an educational session conducted by a trained counselor before entering into a reverse mortgage agreement. If a borrower is receiving some type of public benefits, such as Supplemental Security Income (SSI) or food stamps, the lender can work with the borrower to structure the loan in such a way that those benefits will not be affected.
According to a recent study by the National Council on Aging, reverse mortgages are still a largely underutilized resource for older adults. Over 13 million households nationwide are potential candidates, with close to $1 trillion in funds available. If an older adult you care about might benefit from a reverse mortgage, you may wish to contact a local reverse mortgage lender for more information. Local reverse mortgage lenders include Financial Freedom Senior Funding Corporation, Wells Fargo Home Mortgage, Mega American Mortgage, James B. Nutter, Paramount Mortgage Company, and Carter Lending. The AARP also offers reverse mortgage counseling and a free publication on reverse mortgages, “Home Made Money,” which can be downloaded from the AARP website at http://www.aarp.org/money/revmort/. Other websites with helpful information about reverse mortgages include the National Reverse Mortgage Lenders Association website, at http://www.reversemortgage.org/, and the National Council on Aging website, at http://www.ncoa.org/content.cfm?sectionID=250.
St. Andrew’s Caring Workplace staff would be happy to help you find out more about reverse mortgages and whether such a loan would be appropriate for your loved one. Please do not hesitate to contact us at 314-802-5106.