What Is a Reverse Mortgage? What to Expect From a Loan
Of the different types of reverse mortgages, the great majority of borrowers choose federally-insured Home Equity Conversion Mortgages, or HECMs. With an HECM, seniors 62 and older are allowed to borrow a portion of their home equity and defer repayment until they pass away, move or decide to sell the home.
The amount that seniors can borrow will depend on the value of their home, accumulated equity, their interest rate, the loan product they choose and their age. According to data compiled by the Center for Retirement Research, a 65-year-old borrower who has $200,000 worth of equity would be eligible to receive around $98,000, or 49% of their equity, based on today's interest rates. That figure includes slightly less than $15,000 worth of fees, including closing costs, the upfront MIP and servicing fees.
If the borrower decided to accept the proceeds in monthly installments, he or she would receive approximately $600 each month. This means that the borrower would receive the full $98,000 after approximately 13.6 years. However, because this would be a lifetime payment, the borrower could end up receiving much more over the life of the loan, which is why some seniors opt for monthly payments instead of accepting a lump sum. Of course, that is assuming that the individual did not need to accept a lump sum in order to repay an outstanding forward mortgage balance.
Whether seniors choose to receive their loan proceeds in a lump sum, monthly installments or as line of credit, the additional income can be a huge help. These benefits are why so many seniors want to know what is a reverse mortgage.
What Is a Reverse Mortgage? What These Loans Do Not Do
To understand what is a reverse mortgage, seniors should also understand exactly what these loans do not do. First, loan proceeds do not impact Social Security or Medicare benefits. Supplemental Security Income and Medicaid benefits might be affected, which should be discussed prior to accepting the loan. Also, since loan proceeds are not taxable income, seniors are not expected to pay income taxes on their payout.
Seniors should also know that getting a reverse mortgage will not affect their status as homeowner. While asking what is a reverse mortgage, many seniors want to know whether they will be required to hand over the title to their home. Fortunately, lenders do not force seniors to give up ownership. However, because seniors retain the title and ownership over the home, they will be required to keep up with necessary repairs, insurance and property taxes. As long as borrowers keep up with these expenses, they will be allowed to enjoy their tax-free proceeds for as long as they remain in their home.