One Idea for an Additional Stream of Income for Seniors: Reverse Mortgage

Try and picture a scenario in which a mortgage company sends you a check every month rather than you sending them a check. This is exactly what you get when you take out a reverse mortgage. Reverse mortgages are gaining in popularity because of increased life expectancies, higher medical costs and the downturn of the stock market over the past few years.

Reverse Mortgages:

A reverse mortgage is a special type of loan that lets a homeowner, 62 years of age or older, convert the equity in their home into cash without having to sell their home or give up the title. The home can be one of the largest assets a senior owns, and a reverse mortgage allows individuals to access that capital as an income stream without having to vacate the property.  A lot of people are in more of a financial bind than they thought they would be in, at this age, because they’re not getting as high a return on their investments, and their expenses are higher than they anticipated. These are the type of conditions that create demand for reverse mortgages.

Reverse mortgages are for house rich, cash poor people who own their own home and want to convert the equity they have built in that home into readily available cash. Rather than requiring the borrower to make payments to a lender each month, as with a typical forward mortgage or home-equity loan, a reverse mortgage pays cash to the borrower. The amount a borrower can access typically depends on their age, the type of reverse mortgage, prevailing interest rates, location of the residence and the value of the home. Borrowers typically have several means of accessing their capital: in a lump sum, via fixed monthly payments, through a line of credit or a combination of these options.

Most reverse mortgages have five payment options:

Tenure:

Borrowers receive equal monthly payments for as long as at least one borrower lives and continues to occupy the property as a principle residence.

Term:

Borrowers receive equal monthly payments for a fixed period of months.

Line of Credit:

This method provides borrowers cash on demand, at the borrower’s discretion, until credit is exhausted.

Modified Tenure:

This method combines a line of credit with monthly cash payments for as long as the borrower remains in the home and credit is not exhausted.

Modified Term:

This method combines a line of credit with monthly payments for a fixed period specified by the borrower.

Most reverse mortgages do not require any repayment of principal, interest or servicing fees for as long as the borrower lives in the home. However, the borrower remains responsible for real estate taxes, insurance, utilities, repairs and maintenance. Cash accessed via a reverse mortgage is tax-free and does not impact regular Social Security and Medicare benefits, although it may affect eligibility for other government programs such as Medicaid. Reading How to Choose a Reverse Mortgage Payment Plan will help you understand more.

The Reverse Mortgage Market:

The Federal Housing Administration, an arm of the U.S. Department of Housing and Urban Development, spawned the U.S. market for reverse mortgages in 1987 when it unveiled the Home Equity Conversion Mortgage (HECM) as part of a reverse mortgage pilot program.

More than 720,000 reverse mortgages have been taken out in the United States since 1987, according to the National Reverse Mortgage Lenders Association in Washington D.C.

Contact our home loan agents in San Ramon for reverse mortgages.