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How Reverse Mortgages Work

Posted by Veronica On February - 10 - 2014

Reverse Mortgages are programs designed to enable senior homeowners 62 years and older to convert part of their home equity into cash. They can do this without having to sell their home or give up the title. Seniors do not have to take on any new mortgage payments either. Instead of making monthly payments to a lender, the reverse mortgage lender makes payments to the senior homeowner.

Frequently Asked Reverse Mortgage Questions:

Q: What is a reverse mortgage?
A; A reverse mortgage is a special type of home loan that enables you to access a portion of your equity tax-free. The loan amount is based on age, home value and the current interest rate. Unlike traditional home loans, or second mortgages, no repayment is required until the homeowner(s) no longer occupy the property as their primary residence. Learn more about the different types of reverse mortgages.

Q: Who should get a reverse mortgage?
A: They are designed for homeowners at least 62 years of age with moderate to significant equity in their homes.

Q: Can I get a reverse mortgage if there is already a mortgage on my home?
A: Yes, but any existing mortgages must be paid off at closing. The proceeds from the reverse mortgage may be used for that purpose.

Q: What types of homes qualify for a reverse mortgage?
A: The following types do NOT qualify for a reverse mortgage: vacation homes or other secondary residences, mobile or manufactured homes (not attached to a permanent foundation), rental properties of more than four units and homes on leased lands.

Q: Will I have any tax liability for the reverse mortgage proceeds?
A: The IRS treats monies received from a reverse mortgage to be loan advances and not taxable income. We recommend that you consult your tax advisor for more detailed information.

Q: What if my home is in a “living trust”?
A: A homeowner who has put the home in a living trust can usually take out a reverse mortgage, subject to review of the trust documents.

Q: Does the money from a reverse mortgage affect Social Security, Medicare or pension benefits?
A: The proceeds from a reverse mortgage do not affect these benefits. We recommend that you consult your financial advisor for more information.

Q: Can the interest charged on my loan principal be deducted for tax purposes?
A: The interest accrues and is deductible when the loan balance and interest is repaid, which is typically when the borrower permanently leaves the property. We recommend that you consult your tax advisor for more information.

Q: Will a reverse mortgage affect my SSI or Medicaid?
A: No, a reverse mortgage will not affect these or most other means tested benefits as long as the monthly cash advances are fully spent every month and not accumulated. Programs do vary by state so it’s advisable to check with your local area agency on aging.

Q: What upfront costs are associated with a reverse mortgage?
A: The borrower will pay an origination fee and closing costs, including charges by the title and escrow companies. All of these costs can be financed as a part of the initial loan advance.

Q: What is due when the loan is repaid?
A: The borrower will pay back the cash advances they have received plus accumulated interest. Any upfront costs that were financed initially will also be added to the loan balance.

Q: Will I ever owe more than my home is worth?
A: No. All reverse mortgages are “non-recourse” loans, meaning the borrower can never owe more than the value of the home regardless of loan balance.

Q: Will the lender take my house?
A: No, this is a misconception; a reverse mortgage is a loan against the property. The title remains in the name of the borrower(s) and the lender is only repaid the loan balance or home value, whichever is less.

Q: If there are no payments, what are my responsibilities?
A: You are required to pay your property taxes, keep the property insurance current, maintain the home, and notify the lender if you will be away from the property for an extended period of time.

Q: How do I receive my money?
A: You have four options: Lump Sum, Monthly Payments (your choice of loan advances for a specific period, or for as long as you live in your home), Line of Credit (unscheduled payments or in installments, at times and in amounts of borrower’s choosing until the line of credit is exhausted), or any combination you would like of the above three choices.

Q: When does the loan become due and payable?
A: The loan is due and payable when the last remaining borrower sells the property, permanently leaves the home, or passes away. Until these events take place you live in the home and make no payments to the lender.

Q: Do I or my heirs have to sell the property to repay the loan?
A: No. Repayment can be accomplished by a refinancing of the existing reverse mortgage with a conventional mortgage loan.

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About the Author

As a broker specializing in multi-units and single family homes in Southern Maine, Veronica Schneider joined the real estate industry in August of 2004 bringing with her over eight years of experience in real estate management. You can find Veronica and Green Tree Realty on Facebook, Twitter, Google+, Pinterest, and LinkedIn.

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As a Portland Maine real estate agency Green Tree Realty specializes in Residential and Investment real estate for southern Maine buyers, sellers and investors looking in the Androscoggin, Cumberland and York counties residential and investment markets.


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