Reverse Mortgages: Are You Eligible & Is It Right For You?

While a reverse mortgage may sound like a complicated concept, the philosophy and definition of the program really is quite simple: if you are eligible for a reverse mortgage you as the borrower are allowed to turn the equity in your home into a liquid asset. The money can then be paid to you in whichever manner you choose—generally as a line of credit, monthly payment, or lump sum.

The amount accessible to the borrower in a reverse mortgage is a percentage of the home's value as determined by the age of the youngest borrower.

Are You Eligible for a Reverse Mortgage?

Reverse mortgages are currently only available to homeowners 62 and older. In addition, they are only available on some kinds of properties. While most property types are eligible, co-ops are currently ineligible (though that is expected to change soon). Bed-and-breakfasts are ineligible, as are manufactured homes built before 1979. The land the home is built on must be owned, it must be on a permanent foundation, and it must meet a Federal Housing Authority (FHA) inspection. I'll address more on eligibility in a future article in this column. Any reverse mortgage loan officer should also be able to answer eligibility questions.

Reverse mortgage programs vary greatly by country and are not available in all countries. The information covered in this column applies to reverse mortgages in the United States. Great Britain, Australia and South Korea are three other countries with popular reverse mortgage programs.

Benefits of Reverse Mortgages

Borrowers choose to take out reverse mortgages for many reasons. Common uses include:

• Funding necessary home repairs such as a new roof or weatherproofing
• Paying medical expenses for yourself or your spouse
• Improving your standard of living
• Adding an additional source of income
• Getting out of debt or foreclosure

Reverse Mortgage Repayment

A reverse mortgage becomes due back to the lender when the borrower passes away, sells the home, or no longer resides in it as a permanent residence. Reverse mortgages can also be due if the borrower does not abide by the terms of the reverse mortgage agreement, which includes staying current on taxes and insurance.

When the reverse mortgage becomes due, the estate has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. However, the estate is not liable if the home sells for less than the balance of the reverse mortgage.

Some heirs may desire to keep the home as part of their inheritance. In this case, the reverse mortgage is usually refinanced—either as a reverse mortgage, if the borrower is over the age of 62, or a forward mortgage, if the borrower is younger than 62.

A reverse mortgage can be a helpful product for many seniors. By converting home equity to a liquid asset, reverse mortgages can provide many homeowners with a much-needed source of income in old age.

Posted in Reverse Mortgages, Reverse Mortgages as an Option