For people who are 62 and older, a reverse mortgage can give the budget some breathing room during retirement. Many people use them to help supplement their income, pay for health care costs or pay off a mortgage.
But beware – reverse mortgages are often complicated and may not be the best option, depending on your situation.
Read more about a reverse mortgage and whether it can be used to help you get ahead in retirement. (See more at: 5 Signs a Reverse Mortgage is a good idea. )
Reverse Mortgage 101
A reverse mortgage is actually a loan. If you are over 62, you can borrow money with the equity in your home as collateral. In most cases, the loan is paid in monthly amounts. It is not necessary to repay the reverse mortgage loan until you permanently move out, sell the home, or pass away.
With a typical mortgage, you borrow money from a lender and pay back the principal and interest in monthly installments until you own the home outright. When you borrow money with a reverse mortgage, the lender makes monthly payments to you. Payments are based on a percentage of the value of your home. You have the option to receive the entire amount of the reverse mortgage in a lump sum, in monthly payments, or in a line of credit to be used as needed.
Ultimately, the more money you receive from the reverse mortgage, the less equity or property you have in your home. If you pass on while the equity remains in the home, the remaining value after fees and costs goes to your heirs. Although TV commercials seem to say you'll never outlive your reverse mortgage, that's not accurate. (To read about this, see: Choosing the Right Reverse Mortgage Lender and Reverse Mortgage Pros and Cons )
Can you survive a reverse mortgage?
There are certain requirements that accompany a reverse mortgage. If you do not comply with these provisions, you may survive a reverse mortgage. Below are some requirements for a reverse mortgage:
- The reverse mortgagee listed on the title must be at least 62 years old.
- The reverse mortgage must be the primary debt on the home. Any existing mortgage must be repaid with the reverse mortgage proceeds.
- The home used as collateral for the reverse mortgage must be the homeowner's primary residence, not a vacation home or investment property.
- Borrowers must pay property taxes, homeowners insurance and other mandatory fees on time.
- The borrower must maintain the property and make any necessary repairs.
If you fail to meet any of these requirements, you could lose the home.For example, not paying your property taxes can trigger a loan default. If you don't pay the property taxes on the home, the lender could foreclose on the property. Another way you can survive your mortgage is if you don't live in the house for more than six months. This can also trigger a loan default.
In a consumer finance. gov article, Nora Dowd Eisenhower warned that "Reverse mortgage borrowers can outlive their loan funds by borrowing without careful planning." She went on to say that television commercials can mislead consumers into thinking that there is no way for a borrower to outlive their principal, and that is not true. All reverse mortgage requirements are listed on the loan document. If you are not in compliance with the loan, you are subject to foreclosure of the home and subsequently outlive the loan.
If you meet the terms of the reverse mortgage, you cannot survive the loan. Even if you live to age 110 and meet the reverse mortgage loan, you will not be evicted or forced to sell. The home is the collateral for the reverse mortgage loan balance and the reverse mortgage program is federally insured by the Federal Housing Administration (FHA). As with any loan, there are certain fees and expenses. One cost of the reverse mortgage loan is the FHA insurance premium, which protects the lender from any shortfall when the home is sold and the loan is repaid.