I have been hearing more and more about reverse mortgages. What are they and where should they fit into the financial picture? They are called reverse mortgages because you are using your equity to get income, which is opposite of what you did when you purchased your home, when you had income and wanted equity.

Reverse mortgages are non-recourse loans that enable someone 62 or older to stay in their own home by converting home equity into tax-free proceeds. Interest accrues, but there are no more payments as long as the home remains the primary residence. The accrued interest is normally paid by the estate at death. There are no income, medical, assets, or credit score requirements to qualify. The proceeds do not affect Social Security or Medicare benefits, though they may affect eligibility for Medicaid and other government entitlement programs.

There are numerous safeguards built into the program, which include mandatory HUD approved counseling, payment guarantees, interest rate caps, and three-day right of rescission, etc.

There are four absolutes with a reverse mortgage:

• never have to make any more payments while the home remains the primary residence

• never give up title

• never owe more than the sale price of the home

• never be forced to move

There are certain eligibility requirements. You must be at least 62 years old and own your home free and clear or use loan proceeds to pay off remaining home debts or liens. You must agree to attend an informal session with a HUD-approved counseling agency prior to the loan. As mentioned above, the home must be your primary residence. Eligible properties include single-family homes, condos, manufactured homes, and one-to-four unit owner-occupied dwellings.

There are certain conditions when the loan becomes payable and due. You are responsible for maintaining the home and keeping it in good repair. You are responsible for paying the taxes and insurance related to the home.

How might a reverse mortgage be used in a sound financial plan? The payments made to you are not taxable, as they are considered loan payments, not income, and accrued interest payments are generally deductible upon repayment of the loan. By retiring your mortgage, you free money for investments that can augment your retirement nest egg, allowing you a more comfortable retirement.

The additional money might be wisely spent on purchasing a long-term care policy, enabling you to continue to stay in your own home rather than be forced to go to a nursing home when extended care becomes necessary.

If you wanted to leave money to your heirs, you have effectively reduced your taxable estate and can increase your nontaxable estate by purchasing a life insurance policy made payable to your desired beneficiaries.

If you end up living in your home well past your life expectancy or your home appreciates at a slow rate, then your decision proved to be excellent one. On the other hand, if you die within just a few years after the loan is executed the decision was a costly one.

Reverse mortgages may be an option for securing your financial independence and making those golden years more golden. With a reverse mortgage, you are using your equity to get income, which is opposite of what you did when you purchased your home, when you had income and wanted equity.


Article by Babs W. Hart originally appeared in
The Tuscaloosa Business Ink.