Discover the Benefits of a Reverse Mortgage Line of Credit

Boosts cash – Many seniors experience a significant income reduction when they retire. Monthly mortgage payments are the biggest expense for many. A senior with sufficient home equity, however, can refinance, pay off an existing regular mortgage, and even pull cash from the property with a reverse mortgage.

You don’t have to move – According to AARP, “between 50 and 60 percent of adults age 18-49 say they want to remain in their communities and homes as they age, while nearly 80 percent of adults age 50 and older indicate this same desire.” Rather than move, a reverse mortgage may allow seniors to age in place and be near friends and family. Also, because there are costs associated with selling, moving and resettling, the result is less equity because of the expenses involved.

Costs may be lower – There is a cost to reverse mortgages, but it may be cheaper to get a reverse mortgage than to move. You can get a good sense of reverse mortgage expenses by using the National Reverse Mortgage Lenders Association calculator. Alternatively, to move means expenses to sell the home, move household goods and either buy a replacement residence or rent in a new location.

The money you get from a reverse mortgage is not taxable – According to the IRS, “reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.” At the same time, the IRS adds that reverse mortgage interest “isn’t deductible until you actually pay it (usually when you pay off the loan in full). Tax rules, as usual, can be complicated so be sure to see a tax professional for advice.

No claim against heirs – Because a reverse mortgage balance will grow in size, it’s possible that reverse mortgage debt can exceed the fair market value of the property over time. However, the responsibility to repay the debt can never exceed the property’s value. That’s because a reverse mortgage is an example of “non-recourse” financing. The result is that lenders have no claims against other assets or heirs.

You continue to own the home – Reverse mortgages can be paid off by borrowers but typically end when individuals move, sell or pass away. In an estate situation, heirs have several choices: First, they can sell the property to repay the debt and keep any equity above the loan balance. Second, they can keep the home and refinance the reverse mortgage balance if the property’s value is sufficient. Third, if the debt exceeds the value of the property, heirs can settle the loan by giving the title back to the lender. The lender can then file a claim for any unpaid balance with the insurer, almost always the FHA.

Reverse financing is not free – Reverse mortgages have costs that include lender fees, FHA insurance charges and closing costs. These costs can be added to the loan balance; however, that means the borrower has more debt and less equity. The NRMLA calculator illustrates the costs reverse mortgage borrowers can face.

Interest rates – HECMs are structured so that both adjustable-rate and fixed-rate financing options are available. If you want fixed-rate financing, the amount of equity you can access will be smaller than a reverse mortgage with adjustable-rate interest. The NRMLA calculator shows both fixed-rate and adjustable-rate options.

Program violations – A reverse mortgage may cause borrowers to violate asset restrictions for the Medicaid and Supplemental Security Income (SSI) programs. This is complicated stuff, so be sure to speak with an attorney who specializes in elder law or a legal clinic before searching for a reverse mortgage program. If fees are a concern, see if pro-bono legal help is available in your community.

Your home can be foreclosed – Since reverse mortgages do not have required monthly payments for principal and interest, it might seem as though foreclosure is impossible. Not so. Seniors can have their homes foreclosed if they do not pay property taxes, maintain property insurance, fail to pay HOA bills, etc.

Status changes – Reverse mortgages get complicated. If the borrower goes to a long-term care facility, are they still considered a resident in the home? If a borrower marries after obtaining a reverse mortgage, must a spouse move out of the property if the borrower dies? For details regarding these and other questions, it’s best to speak with a lender or an attorney who specialize in elder law or contact a legal clinic.

Why reverse mortgages may be more useful today

Two market trends may cause seniors to re-examine their reverse mortgage options.

First, in the past decade, home equity has grown enormously as home values have risen. Equity is generally defined as the value of a home less outstanding mortgage balances. While not all homeowners have benefited from rising values, millions have:

As of the first quarter of 2020, the Federal Reserve estimates that American homeowners have about $19.6 trillion in real estate equity.

Much of the equity is held by seniors. A recent estimate from the NRMLA is that seniors have $7.54 trillion in real estate wealth.

Second, mortgage rates have fallen through the floor. According to Bankrate, the national average rate for fixed-rate 30-year financing was 3.24 percent as of August 13.