A Reverse Mortgage
sells the home to the
bank
Lenders are not in the
business of owning homes
— they wish to make
loans and earn interest.
The homeowner keeps the
title to the home in
their name. What the
lender does is add a
lien onto the title for
the amount that is
borrowed so that the
lender can guarantee
that it will eventually
get paid back the money
it lends.
Heirs will not
inherit the home
The estate inherits the
home as usual but there
will be a lien on the
title for the balance of
the Reverse Mortgage.
The balance is whatever
proceeds were received
from the Reverse
Mortgage plus interest.
Example, let’s
assume someone takes
out a reverse mortgage
and owes $50,000 after 5
years. Then the
homeowner passes away
and the estate sells the
house for $250,000. The
lender gets $50,000 and
the estate inherits
$200,000.
A
Reverse Mortgage is a
“non-recourse” loan
which means the only
asset guaranteeing the
loan is the property
itself. If the property
value is less than the
balance of the reverse
mortgage, the lender can
not request other assets
from the estate and must
make an insurance claim
for the loss to the FHA.
The homeowner could
get forced out of the
home
The FHA
Reverse Mortgage
was created specifically
to allow seniors to live
in their home for the
rest of their lives.
Because the homeowner
receives payments
from a reverse
mortgage instead of
making payments to a
lender, the homeowner
can never be evicted or
foreclosed on for
non-payment. However, it
is the homeowner’s
responsibility to
maintain the home in
good condition, keep
property insurance
current, and pay the
property taxes.
Someone can outlive a
reverse mortgage
The
Reverse Mortgage
becomes due when all
homeowners have
permanently moved out of
the property or passed
away. There is no time
limit.
Social Security and
Medicare will be
affected
Government entitlement
programs such as Social
Security and Medicare
are not affected by a
Reverse Mortgage.
However, need-based
programs such as
Medicaid can be
affected. To remain
eligible for Medicaid,
the homeowner needs to
manage how much is
withdrawn from the
reverse mortgage in one
month to ensure they do
not exceed the Medicaid
limits.
The homeowner pays
taxes on a reverse
mortgage
The proceeds from a
Reverse Mortgage are not
considered income and
are not taxable.
Furthermore,
the interest on reverse
mortgage is tax
deductible when it is
repaid.
There are large
out-of-pocket expenses
Typically the only
out-of-pocket expenses
are the cost of the
counseling and the
appraisal. If requested,
many lenders will agree
to pay the appraisal fee
upfront and finance the
cost into the loan.
A
reverse mortgage is
similar to a home equity
loan
The only similarity
between a Reverse
Mortgage and a home
equity loan is that both
use the home’s equity as
collateral.
-
Any homeowner can
apply for a home
equity loan. A
homeowner must be
age 62 to apply for
a reverse mortgage.
-
A
home equity loan
must be repaid in
monthly payments
over 5 or 10 years.
A reverse mortgage
is not paid back
until the homeowner
moves out of the
property or passes
away.
-
A
home equity loan
requires stable
income and a solid
credit score. A
reverse mortgage
does not consider
income or credit.
-
A home equity loan
charges no closing
costs but has a
higher interest rate
over the life of the
loan. A reverse
mortgage charges
upfront closing
costs but has lower
interest over the
course of the loan