A Complete Guide to Reverse Mortgages
Reverse mortgages can help senior homeowners access their home equity tax free, without having to make monthly loan payments. This can be a smart solution for people over 62 who want to supplement their retirement income or improve their financial stability.
What Is a Reverse Mortgage?
Tax-free cash
You can receive tax-free cash through a lump sum, monthly installments, a line of credit, or a combination, without impacting your tax liability or Social Security benefits.
No monthly loan payments
No monthly loan payments are required, as the loan is repaid only when you move out or sell the home.
Protection against market volatility
FHA-backed Home Equity Conversion Mortgages (HECMs) protect borrowers and heirs from owing more than the home's value at loan repayment, with FHA insurance covering any shortfall.
What Can a Reverse Mortgage Be Used For?
To supplement retirement income
A reverse mortgage can provide monthly installments to supplement your retirement income, investments, and other revenue sources.
To pay property taxes and insurance
It can cover property taxes, insurance, and repairs, freeing up your income for everyday expenses.
For emergenciesÂ
In emergencies, a reverse mortgage offers a lump sum or line of credit to address medical bills, equipment, or unforeseen costs.
Pros
- Get access to your equity
- Stay in your home
- Enjoy flexible payout options
- Pay no taxes on the funds you receive
- Never owe more than the property’s value
Cons
- Only borrowers age 62+ can apply for a reverse mortgage
- You still pay loan origination fees, closing costs, and mortgage insurance
- You risk foreclosure if you fail to meet loan conditions
Talk to a NYFTY expert about finding the perfect mortgage for you.
Alternatives to a Reverse Mortgage
- Borrow a lump sum based on your equity.
- Acts as a second mortgage alongside your existing one.
- Fixed interest rate and payments for the loan's duration.
- A HELOC is a revolving credit line secured by home equity.
- Pay interest only on the amount borrowed.
- Variable interest rates may cause payments to increase over time.
- Replaces your current mortgage with a bigger loanÂ
- You take the difference in cashÂ
- Monthly payments are made on the new mortgage
How Do I Know If a Reverse Mortgage Is Right for Me?
Your have enough equity in your home
To qualify for a reverse mortgage, you need to have plenty of equity in your home to borrow against. The more equity you have, the more you can potentially qualify for.
You can cover upfront costs and keep up with ongoing maintenance.Â
A reverse mortgage involves upfront costs like origination and closing fees and requires maintaining insurance, paying taxes on time, and keeping the home in good condition.
The property is in good condition
A reverse mortgage reduces your home equity over time but allows you to benefit without worrying about inheritance if you don’t plan to leave the property to heirs.
When Is The Best Time To Use a Reverse Mortgage?
The best time to use a reverse mortgage is when you are near or in retirement. If you have substantial home equity but a fixed income like many seniors in this stage of life, a reverse mortgage can give you more financial flexibility. You may also want to consider this program if you plan to stay in your home or want to avoid liquidating your retirement savings to pay for medical bills and other necessary expenses.
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FAQ
Are there income or credit score requirements for a reverse mortgage?
What happens if I already have a mortgage on my house?  Â
If you have an existing mortgage, you can use the funds from your reverse mortgage to satisfy your current loan. Then, the reverse mortgage would become your primary lien, and no monthly payments would be required. Â
Can I apply for a reverse mortgage on any home? Â
Some homes may not be eligible for a reverse mortgage. The home must be your primary residence and meet certain requirements, like being a single-family home, a multi-family home with up to four units, or an approved condominium or manufactured home.
Can I buy a different home with a reverse mortgage? Â
You can purchase a new home by using a specific type of reverse mortgage called a Home Equity Conversion Mortgage for Purchase (HECM). This allows you to buy a new primary residence without making monthly mortgage payments, but the new home must meet specific criteria.
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