What is a Reverse Mortgage?
A reverse mortgage is a type of loan available to people aged 62 or older, used as a way to convert home equity into one or more cash payments. Unlike forward mortgages, in which you build equity in your home by repaying the loan, reverse mortgages are not repaid on a monthly basis. Instead, the total loan (including the accumulated interest) is repaid when the surviving borrower sells the home, permanently vacates the property, or dies. Since the equity in the home is taken out in cash, your debt increases over time and equity in the home decreases. The amount you owe (your debt) gets larger as you receive more cash and more interest is added to your loan balance, and as your debt grows, your home equity shrinks, unless your home's value is appreciating more rapidly than your debt is growing.
What are the benefits of a Reverse Mortgage?
- You do not need to make monthly payments on the loan. The interest of the loan will increase the outstanding debt of the loan over time.
- You retain ownership in the home, even if the amount of the mortgage exceeds the value of the home.
What are the drawbacks of a Reverse Mortgage?
The closing costs normally exceed those for a conventional mortgage, which can make the loan expensive if you remain in the home for only a few years. Under certain circumstances, the proceeds from a reverse mortgage could affect your eligibility for some public-assistance programs such as Supplemental Security Income (SSI) or Medicaid. In general, reverse mortgage payments do not count towards Medicaid resource limits as long as the funds are spent each month, nor do they count toward the income limits for determining whether Social Security benefits are subject to taxation. You should consult your tax advisor for further information regarding your particular situation.
How are Cash Payments received from the Reverse Mortgage?
You can receive payments in any of the following ways:
- One time lump sum
- A monthly annuity that pays for a guaranteed period of time or for your lifetime
- As a line of credit from which you can withdraw money on an as needed basis