Reverse mortgage: What it is and how seniors use it

Without regular income, it is possible to have financial difficulties after retirement. A reverse mortgage may be an option for homeowners who want to manage their financial problems.

Reverse mortgages are home loans that allow homeowners aged 62 or older to take out some of their equity and then convert it into cash. The proceeds are exempt from taxes and you don’t need to make mortgage payments.

Reverse mortgage proceeds can be used however you want. These funds are often used for expenses like:

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  Consolidation of Debt
  

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  Living expenses
  

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  Home Improvements
  

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  Helping kids with college
  

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  You might consider buying another home to better suit your needs as you get older
  

Reverse mortgages are the opposite of traditional home loans. Instead of making a monthly payment to the lender, you pay the lender. You will still need to pay homeowners insurance, property taxes and other associated costs or you may be subject to foreclosure.

A sliding scale of life expectancy determines how much you will receive as a reverse mortgage. You can withdraw more equity the older you get.

Two types of reverse mortgages are insured by the Federal Housing Administration: an adjustable-rate and fixed-rate.

1. 
   Reverse mortgages with fixed rates are made up of one lump sum payment.
   

2. Five payment options are available for adjustables:

• Employment: Monthly payments for as long as you and your spouse are in the home

• Term Monthly payments for a set period

• Credit: Unspecified Payments when You Need Them, Until You’ve exhausted Your Funds

• Modified tenure Get a line of credit with monthly payments as long as you and your spouse are living in the home

• Modified terms: Credit line and monthly payments for a period of time of your choice

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  If you’re older than 62
  

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  You or your eligible spouse (who must be named on the loan, even if they are not co-borrowers) live in the home as your primary residence
  

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  You have no delinquent federal debts
  

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  If you own your home or have substantial equity
  

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  Attend the mandatory counseling session with an approved counselor for home equity conversion mortgages.
  

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  Your home meets all FHA standards and flood requirements
  

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  As long as you remain in your home, you continue to pay all property taxes and homeowners insurance.
  

A lender will review your credit history and verify your income and financial obligations before issuing a reverse loan.

The Consumer Financial Protection Bureau suggests waiting until you are older to get a reverse mortgage. This will ensure that you don’t run short of cash too soon.

Reverse mortgages almost all are issued as home equity convert mortgages (HECMs), and are insured by Federal Housing Administration. HECMs have strict borrowing guidelines and a loan limit.