What You Need to Know About a Reverse Mortgage
Nov. 21, 2023
When people get older, they want to live a more comfortable retirement. One way to achieve this may be through a reverse mortgage. Unfortunately, however, many people do not understand how reverse mortgages work and how they can impact their families and estate plans in the long run.
At Richard L. Vanderslice, P.C., we represent clients of all ages, including seniors, to assist them with asset-protection plans, long-term care planning, and comprehensive estate planning. Our attorneys serve clients in Philadelphia, Pennsylvania, as well as other areas throughout Philadelphia, Delaware, and Montgomery counties.
What Is a Reverse Mortgage?
A reverse mortgage is a loan that uses the home as collateral. When you take out a reverse mortgage loan, you can stay in the home and have no obligation to make repayments to the lender as long as you are living there. Unlike conventional mortgages used to buy a home, a reverse mortgage does not require you to make monthly payments.
Reverse mortgages are not available to everyone. Only homeowners aged 62 or older with considerable home equity are eligible to borrow against the value of their home. While a reverse mortgage may seem like a beneficial option for retired individuals who just want to enjoy their time, there are many things to consider before taking out a reverse mortgage loan. There are also limits to consider, such as the principal limit that places caps on the amount of money a borrower can receive from the reverse mortgage loan. Under federal law, the loan amount cannot exceed the value of the home.
How Reverse Mortgages Work
Many people do not understand how it is possible to get a mortgage without the requirement to make monthly payments. When a borrower takes out a conventional loan, the bank gives them a lump sum that they pay back with interest over time. The loan must be paid down to $0 at the end of the term. As the name implies, reverse mortgages work in reverse.
The lender makes payments to the borrower, while any interest and fees related to the loan are rolled into the balance. In other words, the borrower’s home equity decreases over time, while the amount they owe grows over time. The balance is not due until the borrower moves out, dies, or sells the home. If the borrower dies, the home will be sold while the proceeds from the sale are used to pay off the debt. If any equity remains, it is transferred to the estate. The borrower’s heirs may be able to pay off the reverse mortgage or refinance in order to keep the house.
Can Anyone Take Out a Reverse Mortgage Loan?
No, reverse mortgages are not available to all homeowners. Only homeowners aged 62 and older can take advantage of this special type of loan. However, age is not the only requirement to take out a reverse mortgage loan. Others include:
The home must be the borrower’s principal residence (in other words, the borrower must be able to prove that they lived there for more than half of the year);
The prospective borrower must own the home entirely (there is no mortgage attached to it anymore) or the mortgage balance must be low;
The borrower does not owe any federal debt, including student loans and federal income taxes;
The borrower must either have sufficient funds or agree to set aside funds from a reverse mortgage to pay for repair and maintenance costs and other costs associated with the property, including taxes and insurance;
The home must be in good shape, meaning it must meet property standards to qualify for a reverse mortgage loan; and
The borrower must get counseling from an approved reverse mortgage counseling agency.
If you are considering taking out a reverse mortgage loan, you might want to speak with an attorney first. Our attorneys at Richard L. Vanderslice, P.C., can explain the options available to you and provide you with the guidance you need.
Understand Your Options
At Richard L. Vanderslice, P.C., we assist clients in Philadelphia, Pennsylvania, and surrounding areas with all of their estate planning needs. Our attorney can review your situation and determine whether taking out a reverse mortgage would be a sound financial move in your case. Get in touch today to schedule a consultation with our attorney and discuss your options.