A reverse mortgage isn’t your typical loan. Also known as a home equity conversion mortgage, a reverse mortgage allows homeowners aged 62 and up to borrow against their accrued home equity. You can get cash or a line of credit from the lender, and unlike a forward mortgage, there are no monthly loan payments to make. Instead, the loan is repaid when the borrower dies, moves out or sells the home.
In most cases, reverse mortgage loans are not repaid by the borrower. Reverse mortgages provide tax-free income that can help you better handle your living expenses and have a more comfortable retirement. The good news? The benefits don’t end there.
Let’s look at what you stand to gain from a reverse mortgage loan.
1. You Retain the Ownership of Your Home
Reverse mortgages offer security. A common misconception is that the lender will take ownership of your home once you sign on the dotted line. Well, this couldn't be further from the truth. The title never changes hands – the lender only receives a mortgage lien. By complying with the terms of the loan, for instance, paying property taxes and homeowner's insurance, the lender can never take your home.
Also, there are no monthly payments, so the risk of default is very minimal.
2. You’re In Complete Control
Several loan disbursement options are available to retirees, and you get to choose the one that works best for you. You can receive payments as a line of credit, monthly payments, in full or in partiality. The choice is yours.
Plus, you decide how much money you take out of your equity. You can use up as much or as little of your equity as you please. Heirs will inherit the home and keep the remaining equity once the reverse mortgage is paid off.
3. You Don’t Have to Move
Retirement comes with a lot of talk about downsizing and moving to a more affordable home. It took a lot of years to grow your home equity; why not let it work for you? With a reverse mortgage, you don't have to let go of the memories. It allows you to age in place and stay near friends and family. Plus, you don’t have to deal with the costs and hassle of buying another home or renting.
4. You’re Protected If the Housing Market Declines
Reverse mortgages are government-designed and highly regulated. They offer a fair and safe way to access your equity. Since a reverse mortgage grows in size, a situation may arise where the loan balance exceeds the fair market value of the home. The good news is that reverse mortgages are a form of “non-recourse” financing. The amount of debt that can be repaid can never exceed the value of the property.
So, you can rest assured that the lender cannot claim against your other assets.
5. Your Heirs Still Have Options
In an estate situation, your heirs have several options available to them: They can sell the home, repay the debt and keep the remaining equity. Or, they can choose not to sell, in which case they'll have to refinance the mortgage balance. Either way, they don't have to reach into their own pockets to settle the debt even if the debt exceeds the value of the property.
6. No Tax Liability
Unlike other retirement incomes such as 401(k) distributions, funds from a reverse mortgage cannot be taxed. The IRS categorizes reverse mortgage payments as loan advances rather than earned income. Moreover, these payments have no implications on your Social Security or Medicare benefits.
But there’s a catch, the interest accrued on the loan is not tax-deductible until you actually pay it, which happens when you pay off the debt in full.
7. You’ll Pay Off Your Existing Home Loan
Another terribly common misconception is that you ought to have paid off your home in full in order to take out a reverse mortgage. A reverse mortgage allows you to borrow against the equity in your home, which is based on the difference between what you owe on your mortgage and your property’s market value at the time.
In fact, you can use the proceeds from your reverse mortgage loan to pay off your existing home loan. This way, you get to free up those monthly payments.
Is a Reverse Mortgage a Good Idea?
Like any financial decision, taking out a reverse mortgage requires careful deliberation. That said, a reverse mortgage is a great idea if you're planning to stay in your home for a long time and can afford to cover your homeowners' insurance and property taxes.