If you're near retirement age, and need some funding to finance home renovations, pay off your current mortgage, or to help cover medical expenses, there is a way to get cash fast without taking out a loan. It's called a reverse mortgage and many Americans over the age of 62 are taking advantage of it these days. How does it work? In a traditional mortgage, you pay your lender. In a reverse mortgage, your lender actually pays you. That's because in a reverse mortgage, you convert the equity of your home into cash, and you don't have to repay the loan as long as you live in the home. Instead, the loan is repaid to the lender when you die, sell the home, or when it's no longer your primary residence. In most cases, the proceeds of this type of loan are tax-free, and many reverse mortgages do not have income restrictions. There are three types of reverse mortgages:
1. Single-Purpose Reverse Mortgages - Offered by some state and local government agencies and non-profit organizations, these are usually the cheapest option. Like the name implies, these can only be used for one purpose, as specified by the lender. For example, if you need money specifically to pay off medical bills, a lender may grant you this type of reverse mortgage, but you can only use the money for that purpose, and must provide proof that you are doing so. Typically, single-purpose reverse mortgages are for people with low to moderate income levels.
2. Federally-Insured Reverse Mortgages -- These are often referred to as Home Equity Conversion Mortgages (HECM) and are backed by the U.S. Department of Housing and Urban Development (HUD). Before applying for a HECM, you are required to meet with an independent government-approved housing counseling agent to go over the costs and alternative options. These reverse mortgages are very common, and they don't come with any income or use restrictions. The only catch is that the amount of money you can borrow is determined by your age, the appraised value of the home, and current interest rates. There are also several options of how you receive the money. You may get a fixed amount each month, fixed cash advances, or a line of credit where you can draw money whenever you need it. One thing to remember -- these reverse mortgages come with upfront costs. Be prepared to pay origination fees, a mortgage insurance premium and closing costs.
3. Proprietary Reverse Mortgages -- These are private loans that are backed by the companies that develop them. They are similar to HECM in that they generally do not have income restrictions, and you can use the money any way you'd like. However, the value of your home and how much you still owe on your original mortgage can affect how large of a reverse mortgage you receive. Regardless which type of reverse mortgage you choose, there are a few things you need to keep in mind:
- Reverse mortgages do not affect your Social Security or Medicare benefits.
- You'll get to keep the title of your home.
- The reverse mortgage does not have to be paid off until the youngest borrower in the home dies, sells the home, or no longer lives there.
- In the HECM program, you can live in a nursing home for up to 12 consecutive months before you have to start paying the loan back.
- Some reverse mortgages have fixed rate interest, but many come with adjustable rates.
- The amount you owe on a reverse mortgage grows over time. Interest is charged to the outstanding balance and added to the amount you owe each month.
Published with permission from RISMedia.