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Question: I’m in my 80s and have recently been hit with medical bills that are more than I’m able to pay on a monthly basis. My daughter suggested I take out a reverse mortgage to increase my cash flow. I need the money now and have plenty of equity in my home, but it seems risky. What would a reverse mortgage mean for me?
Answer: Depending on the circumstances, reverse mortgages can be helpful for some seniors, but you’re right — they can be risky. It’s important to understand what you’re getting into before making the leap.
A reverse mortgage is a specific type of home equity loan that is available for people 62 and older. With a reverse mortgage, rather than making monthly payments toward the loan, you’ll receive monthly payments taken from the equity you’ve established.
It’s different from other home equity loans/second mortgages because it doesn’t require monthly payments to the principal and interest. However, you’ll still be required to pay other fees to maintain the house.
There are a couple types of reverse mortgages, but they’re most commonly offered through the Home Equity Conversion Mortgage (HECM) program and are federally insured by the Federal Housing Administration (FHA).
Anyone with a reverse mortgage can sell or refinance their home, but those processes can be expensive and tend to be more complex than with a traditional mortgage.
If you need to move or sell … A reverse mortgage requires you to live in your home full time. If you decide to move in with family or to an assisted-care facility, you cannot do so for longer than 12 months unless you sell the house.
When you sell, you’ll need to repay the entire balance of the loan, including interest. After the balance is paid, anything left over from the sale is yours to keep.
Most reverse mortgages have a nonrecourse clause, which means you can’t owe more than the value of the home once it’s sold.
If you want to refinance … There are a few reasons to consider refinancing on a reverse mortgage, such as an increase in principal limits, a drop in interest rates or an increase in your property value. Another reason a person might refinance is to put his or her spouse on the loan. If you’re the only one on the loan and need to move into an assisted-care facility, your spouse will have to sell the house and repay the balance unless he or she is added to the loan.
It’s important to have good counsel if you’re considering a refinance, because the process can be complicated and costly.
Your spouse (if he or she is not on the loan), heirs and/or estate will need to pay back the loan. Usually this means they’ll need to sell the home.
If there’s any equity left after the sale and loan repayment, they’ll be able to keep it — and if the home sells for less than the outstanding balance, they won’t have to pay the difference. However, if they want to keep the house, they must repay what’s owed in full to do so.
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