A reverse mortgage is a loan available to homeowners aged 62 years or older that allows a homeowner to borrow against the equity they have in their house in the form of a lump sum, fixed monthly payment, or line of credit.
Unlike a typical mortgage, with a reverse mortgage, the bank pays the owner of the house monthly mortgage payments, and when the owner of the house passes away or chooses to sell the home, the entire reverse mortgage balance becomes due and payable.
As long as the borrower is 62 years of age or older and lives in the home, he or she is not required to make any monthly payments towards the loan balance. The concept of the reverse mortgage originated as a way to help retirees with limited income use and benefit from the equity which they have built up for their house without having to sell the property.
With these types of mortgages, the owner of the property is ultimately responsible for the property taxes, homeowners’ insurance premium, utilities, fuel, maintenance, and other common household expenses. If only one spouse signed the loan paperwork, in certain situations, the other spouse may continue to live in the home even after their spouse passes away if he or she continues paying the above-noted bills and maintains the property. However, since the other spouse was not a part of the loan, all payments under the reverse mortgage will cease.
Most reverse mortgages have a “non-recourse” clause, which means that the value of the reverse mortgage cannot exceed the value of the home when the loan becomes due and payable. This can be beneficial upon the death of the homeowner because there will not be any bills related to the reverse mortgage outside of the equity in the house.
No other assets in the estate of the deceased homeowner are affected. There are three different types of reverse mortgages. As with any type of transaction, it is important to shop around for the best option for your home and fully understand the complexities of the transaction before locking yourself into a long-term loan.
Single-Purpose Reverse Mortgage
With this type of mortgage, homeowners can use single-purpose reverse mortgage proceeds only to pay for specific items that are approved by the lender. This single purpose may be for necessary repairs and maintenance, or payment of property taxes. The lender on this type of file is a state, local, or non-profit agencies. This type of mortgage considered the least expensive type of reverse mortgage. This option can be beneficial to many homeowners because it offers fewer expenses and fees than other types of reverse mortgages.
Home Equity Conversion Mortgage
This type of mortgage is likely to be more expensive and is the most widely used version of the reverse mortgage. This is because there are no income requirements, and the proceeds from the loan can be used for any purpose. This loan does not carry the same single-purpose limit detailed above.
The Home Equity Conversion Mortgage, or HECM, is insured by the Federal Housing Administration, or FHA, which means it has loan limits and some additional guidelines in place to protect borrowers. The HECM loan limit, or maximum claim amount, for 2022 is $970,800. That means the highest home value that can be used to calculate your reverse mortgage proceeds is $970,800.00.
Counseling is typically required before applying for this loan due to the higher expenses, interest rates, and payback requirements of this loan. Because this is a federally insured mortgage, there are usually high up-front or monthly ongoing insurance payments. These payments are usually taken out of the loan itself, and reduces the amount you are able to borrow.
Proprietary Reverse Mortgages
A proprietary reverse mortgage is not available to the average homeowner. As of 2022, in order to qualify for this type of reverse mortgage, your home must have a value of at least $970,800.00. This is not a federally insured mortgage and often has less stringent insurance requirements.
If you are considering this type of loan, you should also apply for the Home Equity Conversion Mortgage. This way, you can compare fees for both types of reverse mortgages to find out which loan fits better for your situation.
Wrapping It Up
Reverse mortgages do possess a poor reputation in the eyes of many due to several scams which look to target unsuspecting seniors and dishonest marketing to try to get homeowners to take out reverse mortgages. For instance, in late 2021, the Consumer Financial Protection Bureau filed a complaint and levied a $1.1 million fine against American Advisors Group for deceptive marketing regarding reverse mortgages.
Using a reverse mortgage can eat up the equity in your home, meaning there is less value to your estate that is left for your heirs. If your goal is to leave the house for your heirs to live in, a reverse mortgage may not be the right type of loan for you. On the other hand, using a reverse mortgage may allow older homeowners to better manage their expenses during retirement. You also would not have to pay taxes on the income you receive from a reverse mortgage, as it is not taxable because the IRS considers that income as “loan proceeds.”
Reverse mortgages have both pros and cons, and it is important that you understand the complexities of a reverse mortgage to know whether such a loan is right for you and your family. If you would like to discuss how a reverse mortgage may benefit your situation, please contact an attorney at The Orlando Law Group, P.L. via phone at 407-512-4394.
The attorneys at The Orlando Law Group represent individuals throughout Orlando, Waterford Lakes, Altamonte Springs, Winter Garden, Lake Nona, St. Cloud, Kissimmee, and throughout central Florida.
If you are dealing with a real estate or estate planning issue, are wondering if a reverse mortgage is right for you, or are looking to establish your own estate plan, please reach out to our office at 407-512-4394, or fill out our online contact form.
If you have questions about anything discussed in this article or other legal matters, give our office a call at 407-512-4394 or fill out our online contact form to schedule a consultation. We have an office conveniently located at 12301 Lake Underhill Rd, Suite 213, Orlando, FL 32828, as well as offices in Seminole, Osceola and West Orange counties to assist you.
Last Updated on February 18, 2023 by The Orlando Law Group