Lately, you've likely noticed a glut of television, radio and even Web advertisements — many of them featuring well-known actors — all talking about a retirement and planning tool called reverse mortgages. Even its name is odd: What in the heck is a reverse mortgage, and should you bother to look into them? After all, these ads talk a great deal, but none really explain what the true nature of these products are. If you're close to your retirement or already in retirement, you may want to read on to discover more about these all-too-tempting sounding arrangements.
Overseen by the Department of Housing and Urban Development (HUD), these are loans against the mortgage principal, and a qualifying individual can elect to access this equity in a lump sum, a line of revolving credit or in monthly payments.
First things first: What is a reverse mortgage?
Essentially, if you're an American of at least 62 years old, a reverse mortgage allows seniors who own their homes to borrow funds against the equity they've established. Overseen by the Department of Housing and Urban Development (HUD), these are loans against the mortgage principal, and a qualifying individual can elect to access this equity in a lump sum, a line of revolving credit or in monthly payments. The loan is repaid once the owner of the home dies or a surviving spouse vacates the property. If that property appreciates in value, homeowners can even draw second or sometimes third reverse mortgages. During this time, the homeowner retains the title to his or her property.
What do people use reverse mortgage loans for?
With a reverse mortgage, there are no limitations for how the homeowner chooses to spend the loans. Most individuals find that they just haven't saved enough money to last, and oftentimes, seniors elect a reverse mortgage to support long-term care or other medical needs that would otherwise bankrupt them. Yet many more take advantage of these funds to enjoy retirement; whether that includes travel, spoiling the grandkids, funding educations, or just to have a safety net.
What are the homeowner's obligations? Since reverse mortgages aren't designed for wealthy retirees, if your liquid assets are greater than the home's equity, a reverse mortgage is not right for you. And although maximum loans can vary from county to county, the amount cannot exceed $625,500. If you are eligible for a reverse mortgage, HUD does require you to pay your property taxes, ensure the home is in good condition, and maintain the proper homeowner's insurance. Failure to remain current in these areas could result in a default on the loan.
Furthermore, in order to apply for reverse mortgage, you must complete a HUD-approved counseling session. During this session, the counselor will explain all the financial and legal aspects of a reverse mortgage, and answer any questions you may have to ensure you fully understand the loan for which you will be applying. After completing this session, you receive a “certificate of counseling”; a prerequisite before applying for a reverse mortgage.
What about taxes?
The funds you borrow against your reverse mortgage loans are not subject to taxation, and does not have any impact on your ability to receive Social Security or Medicare.
How do I learn more about whether a reverse mortgage is right for me?
The answer is easy: Simply ask your financial advisor if a reverse mortgage could be advantageous to you, and follow his or her advice.
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