Capital Retirement Mortgages Explained
Introduction to Reverse Mortgages
Tapping into Home Equity
A reverse mortgage is a special type of home loan for older homeowners that allows you to convert a portion of the equity in your home into cash. Unlike a traditional mortgage where you make monthly payments to a lender, with a reverse mortgage, the lender pays you. The money you receive is typically tax-free and can be used for any purpose.
The most common type of reverse mortgage in the United States is the Home Equity Conversion Mortgage (HECM). HECMs are insured by the Federal Housing Administration (FHA), which provides certain protections for both the borrower and the lender.
How It Works
Think of it as the opposite of your original mortgage. With a traditional mortgage, your debt decreases over time as you make payments, and your equity grows. With a reverse mortgage, you receive payments from the lender, and your loan balance increases over time. Interest and fees are added to the loan balance each month.
The loan doesn't have to be paid back until the homeowner sells the home, moves out, or passes away. When that happens, the loan balance, including the interest and fees, is due. The loan is typically repaid from the proceeds of the home sale.
One of the most important features of an HECM is that it is a “non-recourse” loan. This is a crucial protection. It means that you, or your heirs, will never owe more than the home's appraised value when the loan is repaid. Even if the loan balance grows to be larger than the value of the home, the FHA insurance covers the difference.
The non-recourse feature ensures that if your home's value falls, you or your estate won't be stuck with a bill for the difference.
General Eligibility
While specifics can vary, the FHA has several basic requirements for anyone applying for a HECM. To be eligible, you must:
- Be 62 years of age or older.
- Own your home outright or have a significant amount of equity. Any existing mortgage must be paid off with the proceeds from the reverse mortgage.
- Live in the home as your primary residence.
- Not be delinquent on any federal debt.
- Participate in a consumer information session given by an approved HECM counselor.
Meeting these criteria is the first step in the process. The amount of money you can receive depends on several factors, including your age, the current interest rate, and your home's value.
What is the primary function of a reverse mortgage?
With a typical reverse mortgage, how does your loan balance change over time?
In short, a reverse mortgage can be a tool for older homeowners to access the wealth tied up in their homes without having to move.