Your home is your biggest asset and paying down a mortgage loan for 20 or 30 years creates substantial equity. If you’re over the age of 62 and have significant equity in your house, you may be eligible for a reverse mortgage.
A reverse mortgage is a loan that’s secured by the equity in your home. This loan is very similar to a second mortgage or home equity loan, but unlike a home equity loan, a reverse mortgage pays you.
Reverse mortgages are ideal for retirees over the age of 62 who need additional income to pay living expenses, pay off debt, make home improvements or pay medical bills. Introduced in 1989, these types of loans let elderly homeowners access their equity without selling their homes. There are no monthly payments with reverse mortgages, thus no added financial burden.
A reverse mortgage is repaid with proceeds from your estate after you and your spouse pass away, or with proceeds from the sale of your home if you decide to move. Although repayment is not required for as long as you live in the house, you are responsible for the taxes, insurance and maintenance.
Reverse mortgage lenders base loan amounts on your age, the value of the home, the current interest rates and the lending limit for your area. Before speaking with a lender, you can use an online reverse mortgage calculator to estimate your loan amount. There are no income and credit score requirements. However, qualifying for this type of loan requires that you own your house outright or have a low mortgage balance. Once you close on your reverse mortgage, you can use the proceeds to pay off your existing balance.
There are different ways to acquire funds. Reverse mortgage lenders can pay proceeds in one lump-sum, or you can request monthly payments or draw from a line of credit.
Despite the appeal of a reverse mortgage, this type of loan is not always favorable. This loan is perfect for retirees who need extra income to maintain their quality of living, or for retirees who want to eliminate high medical or credit card debt. Additionally, a reverse mortgage is best for people who plan on living in their homes for the remainder of their years.
A reverse mortgage will not interfere with benefits that you receive from government entitlement programs, such as Social Security and Medicare. The opposite is true for government programs that provide financial aid or assistance to those with low or no income, such as Medicaid and Supplemental Security Income. If applying for a reverse mortgage, understand that proceeds from the loan may significantly increase your income, thus affecting your eligibility for certain “need based” government programs.