To uncomplicate things, one must first understand that a reverse mortgage is just another type of loan. It is applicable for a homeowner aged 62 years or older and owns sufficient home equity. So, the homeowner can take a loan against his or her home value and get money as a lump sum, line of credit, or fixed monthly payout.

Thus, unlike the forward mortgage, wherein a homeowner is required to make loan payments, there is no payment as such required in a reverse mortgage.

In this form of a loan, the entire balance only becomes payable and due after the death of the borrower, when he or she sells the home, permanently shifts, or isn’t residing in the home for over a year. According to the Federal regulations, the lenders are responsible for the structuring of the transactions to ensure that the amount of the loan in no way supersedes the property’s value, and under no circumstances, the borrower’s estate or the borrower himself would be accountable for repaying the difference even in case the balance of the loan supersedes the value of the home. A situation like this might arrive in case of a fall in the market value of the house or if the lifespan of the borrower is longer than usual.

Why reverse mortgage?
A reverse mortgage is a scheme for senior members whose net value is primarily associated with their home’s value. As much as it intends to do fair and good, these loans are often complex and costly. At times, they also become a subject of scams. Our objective herein is to help you understand the entire working of the reverse mortgages and how you can shield yourself from the scams and the pitfalls. By the end of this article, you’ll be in a position to decide whether this form of loan is ideal for you or your parents.

Home equity can be counted as a usable wealth only when you downsize, sell, or take a loan against it. And this is exactly where the role of reverse mortgages come into the picture. It is certainly a good alternative for retired seniors who do not have many assets and are getting almost negligible income.

How does it work?
Now, in the case of a reverse mortgage, there’s no payment on behalf of a homeowner to the lending person or agency. It is, rather, the lender who pays the homeowners. The homeowner enjoys full flexibility in the mode of payment. However, he or she has to pay a certain interest over this payment received. This amount of interest is not paid out in cash but is added to the balance loan amount. So, the homeowner wouldn't even have to pay anything upfront. The most comforting part about a reverse mortgage is that the title of the home is also retained by the homeowner. Throughout the loan, the debt goes on accumulating, and the value of the home equity depreciates.

After the death of the homeowner, or when he or she decides to move, the home is sold. From the proceeds of the sale, the lender will repay the principal amount of the loan, the mortgage insurance, interest amount, as well as other applicable fees. If there’s still a remainder amount left, then the homeowner would get it in case he or she is alive, or it will go to the estate in case the homeowner is dead. At times, the heirs might opt for repaying the dues associated with the mortgage if they wish to take over the home. The proceeds from the reverse mortgage aren’t taxable. The IRS does not regard the proceed amount as an income but labels this only as a type of loan advance.

Types of reverse mortgages
Reverse mortgages are of three types: single-purpose, proprietary, and Home Equity Conversion Mortgages (HECMs). Amongst these, the most popular variant is the HECM as it includes almost every type of reverse mortgage, which the lender offers on the homes with a value of less than $765,600. It is also a type of mortgage that you or your parent will probably avail. In case the value of the home is over $765,600, you can avail of the proprietary reverse mortgage, which is more commonly referred to as the jumbo reverse mortgage.

On applying for a reverse mortgage, there's an option to avail of the home proceeds in any one of the six ways listed below:

  • Lump-sum

In this manner, you can avail of all the home proceeds in one go. However, in this option, you’ll have to bear a fixed cost toward interest, while the other five have an adjustable rate of interest.

  • Term payments and line of credit

Under this, the borrower is given an equal payment every month for a period as set by him or her, let’s say 10 years. However, in case the borrower requires money even after the expiry of this term, he or she can avail of the line of credit.

  • Line of credit

In this, the money is made available to the homeowner for borrowing, as needed. So, this ensures that the homeowners pay interest only for the amount borrowed.

  • Term payments

Under this, the borrower is given an equal payment every month for a period as set by him, let’s say ten years.

  • Equal monthly payments

So, this goes on till the time at least one borrower resides in the said home. During this time, the lender provides the borrower with steady payments. It is also referred to as a tenure plan.

  • Equal payments (monthly) and line of credit

Under this, till the time at least one borrower resides in the home, the lender provides the borrower with steady payments every month. However, in case the borrower requires money even after the expiry of this term, he or she can avail of the line of credit.

Using, a method of reverse mortgage known as home equity conversion mortgage for purchase, you can move to a new house from the current one. However, you’ll still need a minimum of 50% equity depending on the current value of the home, and not the amount that was paid by you to avail of the reverse mortgage. The standards may vary from lender to lender.

Is it beneficial to opt for a reverse mortgage?

A reverse mortgage may seem a lot similar to the line of credit or home equity mortgage. Of course, there are a few similarities. In a reverse mortgage, you can either get the line of credit or lump sum, which can be accessed as required, depending on the market value of the home and the amount that that was paid by you. However, in the case of a reverse mortgage, you shouldn’t necessarily have a good credit score or a stable income for qualifying; this is unlike the line of credit or home equity mortgage. Further, no payments are required to be made, and you can occupy your house as your current residence, despite receiving payments against it. Thus, this mortgage is one certain way for seniors to avail of home equity despite not having to sell their homes. It is ideal for senior citizens who have poor credit or restricted flow of cash or aren’t eligible to avail of a home equity loan.

In case you aren’t qualified for either of the listed loans, what other option do you have for funding your retirement? So, in this situation, you could either downsize or sell your home. A few parents even prefer selling the home to their grandchildren or children to ensure that the property stays within the family. Parents can also choose to be their child’s renter if they wish to stay in the child’s home.

Advantages and disadvantages
Here are some pros and cons you need to be aware of when it comes to reverse mortgages:

  • Advantages
    At the age of 62 (or above), you can use a reverse mortgage as a nice and effective method to get substantial cash flow. This is great when your biggest asset is your home and there’s isn’t any other effective loan or way out to fetch you sufficient money to bear day-to-day expenses. With a reverse mortgage, you don’t have to give away your home; rather, you can continue residing in the home till you can bear the insurance fee, maintenance charges, and property taxes. Moreover, if you do not wish to live in an assisted living facility or a nursing home, a reverse mortgage is an ideal option.
  • Disadvantages
    When you take a reverse mortgage, it means that you are writing off a substantial equity amount. Also, if you opt for this facility, you can no longer pass on your home to your children. In case the reverse mortgage fails to keep up with your long-term financial needs, it wouldn’t be an adequate method. If somebody is living with you, your roommate, relative, or a friend, he or she wouldn’t be able to live in your home post your death. If you select a plan like a line of credit, term plan, or lump sum, which does not offer you a lifelong income, wherein you use up all the funds, you might not be left with any money when you require it

Rules related to reverse mortgage
A senior who owns a townhouse, condo, a regular home, or some manufactured house, constructed on June 15, 1976, or anytime following it, is eligible to avail of a reverse mortgage. As per the guidelines of the Federal Housing Administration, the owners of co-operative housing aren’t eligible for the reverse mortgages, as technically they don't own the house that they reside in.

Although there are no specific rules and regulations related to the requirements of credit score or the income availability, there are still norms governing who’s eligible for a reverse mortgage.

Qualification criteria
To be eligible for a reverse mortgage,

  • You should be 62 years or older
  • You should own a minimum of 50% of the home equity
  • You need to agree on paying for the associated fees, which include the interest amount, insurance premium, and loan servicing expenses, among other costs

In all cases, the amount of fees is left at the discretion of the lender.

The lenders have no right to go after the heirs or the borrowers in case the home fails to fetch them even the money that they have already lent to the borrower. Moreover, they should give the heirs a substantial time to make a decision regarding whether they let you sell off the home and clear the dues, or they would take it upon them to clear the dues and keep the house.

Additionally, according to the Department of Housing and Urban Development, every prospective borrower seeking reverse mortgage should undergo a counseling session approved by this department. There is a small fee of around $125 for this counseling session, and it will go on for about 90 minutes. In this counseling session, you’ll be told about all the applicable advantages and disadvantages of opting for a reverse mortgage. Everything explained to you would be done keeping in view your personal and financial circumstances. You’ll also get guidance on how the reverse mortgage impacts your eligibility for Supplemental Security Income and Medicaid. The counselor will also share with you the various methods of receipts of the proceeds. In general, your responsibilities about the rules of a reverse mortgage is to be up to date with your homeowner’s insurance and property tax. Adequate repair and maintenance of the house are also expected from you.

Lastly, in any case, if you do not reside there for anytime more than a year, even if you moved to a long-term care facility due to medical problems, you are liable required to repay the liabilities. In most cases, these dues are paid off by the sale of the house.