Reverse mortgage – What everyone should know before going in for reverse mortgage

A reverse mortgage is the credit taken against your home equity, which you need not repay as long as you to continue to live there. The credit has to be paid back only when you die, sell your home, or move out of your home permanently. Reverse mortgage is ideal for old people who are in need of cash, as it helps them meet their needs while retaining the ownership of their home. Reverse mortgages are applicable only for senior citizens that are 62 or older and live in their home.

How does it differ?
In a normal loan, you get credit against your home, which you repay through regular installments. As you continue to repay the amount with interest, the equity on your home increases and at the end of the loan period, it would have increased considerably.

In case of reverse mortgages, you get credit against your home and don’t repay it. The equity on your home decreases with every payment you get from your lender. In other words, the higher your debts, the lower will be your home’s equity.

Different types
There are three types of reverse mortgages available – single purpose reverse mortgages, federally insured reverse mortgages or HECMs, and proprietary reverse mortgages.

Single purpose reverse mortgages are the cheapest of their kind and meant for home owners who fall in the low-income group. They are not easily available and funded only by few non-profit organizations and local government organizations. Single purpose mortgages are limited to specific purposes stipulated by the government such as home repair, improvement, and property tax payments.

Federally insured reverse mortgages, also called Home Equity Conversion Mortgages (HECM), are not limited for few purposes and also readily available. Federally insured mortgages have high fees and require you to do some groundwork. You have to meet a government housing counselor who will explain whether you qualify for the loan or not and the intricacies involved. This mortgage is federally insured and supported by the HUD, which serves as a big advantage.

Proprietary reverse mortgages are funded by private companies. Though the costs involved with this type are high, you also stand to get a bigger credit if you have a high priced home. They can be used for any purpose and have no medical or income constraints.

Flexible payment options
The credit you get from reverse mortgages can be paid
• As a lump sum
• As equated monthly installments for a fixed number of months
• As equated monthly installments till the full amount is settled
• As credit line payments, in which you determine the amount to be paid whenever you need it, till you reach zero balance in the credit offered
• As a combination of the aforementioned plans

Things to look out for
• Get to know about the type of mortgage thoroughly through authorized sources. For example, you cannot use the credit from single purpose mortgage for any other purposes apart from the stipulated ones and you cannot get proprietary mortgage if you have a low-priced home. Area Agencies on Ageing (AAA) should be able to give you relevant information about these things.
• Usually the credit you get from mortgage is not taxable and hence your Social Security and Medicare status will remain the same. However, in single purpose mortgage, if there is some amount left in your account after your expenditures, it will be considered an income and may affect your Medicaid status.
• You can opt for fixed or variable interest rates on your reverse mortgage.
• Maintaining your home, paying property taxes, and insurance are your sole responsibility.
• Check out for the non-recourse clause to make sure at the end of the mortgage you don’t owe more than your home’s value.
• In case of a violation of the law, you can report to your state attorney general, state banking regulatory agency, and the Federal Trade Commission (FTC).