What is a reverse mortgage Loan? – Retire in a Home that’s Right for You
A reverse mortgage is a way to turn the equity in your home into cash which is usually tax free* without having to make monthly mortgage payments. Instead of monthly payments, the loan is taken against a senior’s home equity and repaid in one lump sum when the last borrower leaves the home. As part of the loan, the borrower is required to continue paying property taxes, insurance and maintenance (and HOA fees, if applicable). These loans can potentially help seniors gain financial independence from increasing living expenses.
*This information does not constitute tax advice. Please consult a tax advisor regarding your specific situation.
Reverse Mortgage Eligibility, Qualifications and Information
- One borrower must be 62 years or older
- Own your home and have equity
- Home is required to be your primary residence (live in your home 6+ months per year)
- Property must be a single-family home, 2- to 4-unit dwelling or FHA-approved condo
- For a home purchase, you must have an adequate down payment for your new home based on your age*
*Not available in all areas. Please contact your Fairway reverse mortgage planner for more details.
- No credit score requirements, some income and credit qualifications apply to ensure you have the ability to pay taxes and insurance.
Potential Advantages of a Reverse Mortgage
Receive money from your home equity which is usually tax free.*
A reverse mortgage makes payments to you from your accumulated home equity, which may enhance and extend your retirement goals. You can receive your money in a lump sum, line of credit, monthly payment or a combination of all three. However, if you choose a line of credit, you may have the option of paying down the line if you want to have less cash and increase your equity.
* This information does not constitute tax advice or financial planning advice. Please consult a tax advisor for tax advice and a financial planner regarding enhancements to retirement plans.
Eliminate your monthly mortgage payment.
With a reverse mortgage, you will not be required to make a monthly payment during your lifetime as long as you live in your home, pay taxes and insurance, and maintain the home (and pay HOA fees, if applicable).
Never owe more than what the home is worth.*
When you permanently move out of your home, whether you sell it or pass away, neither your estate nor your heirs are responsible to pay the deficit if the balance owed on your reverse mortgage exceeds the home value. If your heirs want to keep your home, they can purchase it for 95% of the current appraised value.
*There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes, insurance and maintenance (and HOA fees, if applicable). Credit is subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
Bridge the Medicare gap from age 62 to 65.
Many seniors delay retirement until they are 65, because they cannot afford to pay for their health insurance before Medicare kicks in. By utilizing proceeds from a reverse mortgage, you can avoid paying income tax on money drawn from your IRA or other accounts to help keep your retirement funding plan* in place without diminishing your current assets.
*This information does not constitute financial planning advice. Please consult a financial planner regarding enhancements to retirement plans.
Delay Social Security payments to increase monthly income.*
Since proceeds from a reverse mortgage do not count toward your income, you can delay taking money out of your IRA and avoid paying additional penalties and/or taxes. If you have not drawn Social Security yet, you should consider discussing this with your financial and tax advisors.
*This information does not constitute tax or financial planning advice. Please consult a tax advisor and/or financial planner regarding your specific situation.
Pay for long-term care expenses.
With the proceeds from a reverse mortgage, you could purchase long-term care insurance to handle these expenses without losing your home in the process
Types of Reverse Mortgages
Proprietary Reverse Mortgages
Private loans backed by the companies that develop them.
Home Equity Conversion Mortgages (HECMs)
Federally-insured reverse mortgages backed by the U. S. Department of Housing and Urban Development (HUD). HECM loans enable you to withdraw a portion of your home’s equity and can be used for any purpose. How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including:
- Your age
- The type of reverse mortgage you select
- The appraised value of your home
- Current interest rates, and
- A financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance.
Home Equity Conversion Mortgage for Purchase (H4P)
An H4P (a type of HECM backed by the FHA) enables senior homebuyers to purchase a new primary residence that better suits their needs and obtain a reverse mortgage in one transaction. You can use an H4P if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing. This type of HECM reverse mortgage, if it is offered in your area, may allow you to:
- Build a new customized home
- Relocate closer to friends and family members
- Purchase a home in senior housing community
- Downsize to a smaller, easier-to-maintain home
- Purchase a primary residence suitable for your current needs
- Move into a new home that’s easily accessible with modern amenities
To learn more about reverse mortgages, please contact your local Fairway reverse mortgage planner.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. Must be at least 62 years old. Loan proceeds are not considered income and will not affect Social Security or Medicare benefits. Your monthly reverse mortgage advances may affect your eligibility for some other programs. Consult a local program office or your attorney to determine how, or if, monthly reverse mortgage payments might affect your specific situation. At the conclusion of the term of the reverse mortgage loan contract, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to you and you may need to sell or transfer the property to repay the proceeds of the reverse mortgage with interest from your assets. We will charge an origination fee, a mortgage insurance premium, closing costs or servicing fees for the reverse mortgage, all or any of which we will add to the balance of the reverse mortgage loan. The balance of the reverse mortgage loan grows over time and interest will be charged on the outstanding loan balance. You retain title to the property that is the subject of the reverse mortgage until you sell or transfer the property and you are therefore responsible for paying property taxes, insurance, and maintenance. Failing to pay these amounts may cause the reverse mortgage loan to become due immediately. Interest on reverse mortgage is not deductible to your income tax return until you repay all or part of the reverse mortgage loan.
If you are interested in a reverse home mortgage, please contact your local Fairway reverse mortgage planner.