Reverse Mortgages – What Are They?

Mark DiMercurio | August 20th, 2015

For seniors who are at least 62 and who want to have a little extra money each month, one option available to them is a reverse mortgage.  It can be used to pay off the balance on an existing mortgage, to cover medical bills, or just to be some fun money.  It gives those in their golden years a chance to breathe a bit or go on that long-dreamed of trip.

Reverse mortgages give seniors the chance to leverage the equity in their homes and still live in their homes.  As the name implies, the lender is sending the homeowner money.  And, the reverse mortgage does not have to be repaid while the homeowner is alive.  The loan will be repaid from the estate.

There are three main types of reverse mortgages, which will be looked at shortly.  Regardless of the type taken out, there are some key things to keep in mind.  The homeowner must still pay any homeowners’ association fees as well as the property taxes on the house.  They are, after all, still the owner.  The income from a reverse mortgage is essentially tax free, but the homeowner will have to take care of any origination and other fees.

The first type of reverse mortgage is called single purpose.  These are the least expensive to get into, but the downside is they are not universally available.  The lender has the right to specify what the loan can be used for.  Primarily lower income seniors qualify for this type of loan which can be used to take care of leaking roofs or repiping issues.  It might also be required to take care of back taxes.  Once the loan is granted, it cannot be used for anything other than the specified use.

Next there is the federally insured reverse mortgage.  These loans are guaranteed by the Federal Housing Administration.  Applicants will meet with a financial counselor first to make sure that they are indeed eligible, and that this is the right program for them.  They will be briefed on the ramification of the loan financially and what it will take to repay the loan.  Once eligibility is determined, the application gets filled out and reviewed by a federally backed bank.

Finally, there is the proprietary reverse mortgage.  These loans can be more expensive than the others due to a higher interest rate.  They are more readily available than the single purpose loans, and they don’t typically have any income requirements that have to be met first.  These loans can also be used for whatever the recipient wants.

Like first mortgages, reverse mortgages can be either fixed interest or variable.  If the senior takes out a loan early in retirement and lives a long time, he or she may end up draining all of the equity in the home – something to keep in mind for any heirs.

For those who have questions and who live in the east Bay Area, contact Delta Lending.  Their experts are ready and willing to answer questions and help research whether a reverse mortgage is the best idea.