Reverse mortgages (Home Equity Conversion Mortgages (HECM)) are not a new concept. Formerly known as ‘life estate remainders’, a reverse mortgage is a situation in which older individuals or couples sell their property but can continue to live in it for the rest of their lives. Since the “borrowers” get the cash value - minus the cost of living - from the house, and since money can be paid only to the homeowners, death ends the term of the loan. While not always so in the past, nowadays senior citizens definitely should consider reverse mortgages.
When the bank pays you the mortgage, instead of the other way around, there are some significant benefits:
- Tax-free money
- Estate state tax benefits
- No loan repayment obligations
- A secure home, hopefully for the rest of your life
Not everyone is eligible for a reverse mortgage, and eligibility is two-fold: both the individual(s) asking for the loan and the property itself must meet the proper requirements. Luckily these requirements are not very difficult to meet, are straightforward, and make perfect common sense. If only everything could be so!
Who is eligible? Borrowers must be over 62 and must reside within the home. There are no income tests or health tests. If someone offers a reverse mortgage based on these tests, he or she are not presenting a reputable product and even may be trying to scam the owner(s).
What property is eligible? Eligible property needs either to be completely paid in full, or to have a very minor amount of debt against it. Single family homes, one- to four-unit homes, manufactured homes built after 1976, condominiums, planned developments (PUDs), and town homes all are eligible.
The amount of the loan will be determined by taking into consideration the fair market value of the home and the age of the borrower(s). There are at least four ways you can choose to receive the equity from a reverse mortgage: Options include (1) one lump sum, (2) a line of credit, (3) a fixed term (usually five or 15 years), or (4) a “Tenure Option”. Tenure Options allow for equal payments as long as the borrower lives in the house in question. In addition, it also is possible to blend the options above, and actually is rare for any one cookie-cutter choice to be the best. Because there are so many choices, it is absolutely imperative to seek financial, legal and credit counseling when considering a reverse mortgage.
Flexibility and convenience are two significant advantages of reverse mortgages. Once you select your type of reverse mortgage, you can have the funds electronically deposited into your account. In addition, you can use a reverse mortgage to simplify buying a new home with old equity quite easily.
Fully consider the role a reverse mortgage will play in inheritance. Since a reverse mortgage reflects a life estate, it is important to decide where any residual amount of a loan will go in the event of death preceding the final distribution of the loan.
If you are considering a reverse mortgage, look for a properly trained and certified financial advisor with membership in the NRMLA and/or NAMB. Fannie Mae, the country’s most popular lender, is a good, reputable source. I recommend Fannie Mae in particular because they require a counseling session before any of their approved lenders will consider granting a reverse mortgage.
A reverse mortgage can be a great financial option for seniors, and even comes with the security of a life-long home.
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