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If you are short on cash and big on home equity, a reverse mortgage could be beneficial. A reverse mortgage converts the equity in your home into cash. It works the opposite way a regular mortgage does, instead of you paying the lender each month, the lender sends you payments based on your loan, either in a lump sum, monthly, or as a line-of-credit.
There are three types of Reverse mortgages, insured, uninsured, and FHA, and there are fixed and adjustable interest rates. You may also have to pay origination fees, closing costs, and insurance premiums. Most service charges can be financed into the loan, which of course increases the overall costs of the loan.
The loan is paid back when you sell your home, die, or reach the end of the loan term. If you die your heirs must repay the loan either by refinancing into a forward mortgage, or by selling the home. Since the loan uses your equity, there may be little left for your family, so this should be considered.
There are some advantages to using a reversed mortgage as income. The loan advances are nontaxable so they don’t affect Social Security or Medicare benefits. If you receive Supplemental Security Income they don’t affect your benefits as long as you spend them within the month you receive them, and it’s usually the same for Medicaid (check with local authorities). The interest on the loan isn’t tax deductible until you repay some or all of the loan off.
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