These days, seniors often face a large degree of financial uncertainty. The retirement they envisioned 5 and 10 years ago is, in many cases, not the same as the reality they face: investments are flat or declining, medical expenses and living expenses are higher than ever, and few income boosting options are available. Those seniors that have heard about Reverse Mortgages are likely not sure how they work, and don’t know what questions to ask to begin to learn about them. They will often turn to their financial institution for guidance and information. As a result, by becoming familiar with these products, you can become an even more important resource for your clients but helping them understand alternative income supplements.

A Reverse Mortgage is a special type of loan that gives a homeowner the ability to convert a portion of the equity in their home into cash. The funds aren’t taxable income, and they generally don’t affect the homeowner’s eligibility for Social Security or Medicare programs. An exception is the federal Supplemental Security Income program: beneficiaries must keep their liquid assets under a certain limit to remain eligible. A reverse mortgage customer retains the title to the home and keeps the right to any appreciation in home value when the loan is paid in full. The loan remains in force until the last titleholder leaves the home, sells the property, or passes away. The borrower can’t be compelled to sell or move by the lender. Unlike a traditional second mortgage or home equity loan, there are no required monthly payments. As a result, a reverse mortgage doesn’t put additional pressure on seniors’ already stretched budgets.

The majority of reverse mortgages are Home Equity Conversion Mortgages (HECMs), and are therefore guaranteed by the FHA. In order to help homeowners with properties that exceed FHA lending limits, various proprietary products have been created.

Qualifications for a Reverse Mortgage are simple. All titleholders must be 62 or older and have equity built up in the home. There are no income or credit qualifications. The following qualifications can actually be paid for by the Reverse Mortgage proceeds. Existing mortgages or liens have to be paid off, and the homeowner must remain current on insurance and property taxes.

A reverse mortgage borrower has no restrictions on how the monies can be used. Here are common uses for these funds:

- Paying off debts, often credit cards and mortgages.

- Remodeling projects or other home improvements

- General living expenses

- Vacations

- Health care costs or long term care

- Assisting children with financial obligations

- Taxes

- To fund hobbies

- To defray the rising cost of property taxes

The amount paid for a reverse mortgage depends on the age of the borrower, the value of the home, prevailing interest rates, and FHA lending limits. Older borrowers are able to receive a larger percentage of their equity than younger borrowers. Funds can be disbursed as a lump sum, monthly payment, or extended as a line of credit.

All loan products have origination fees and closing costs. The Reverse Mortgage also has fees and costs, but they can be paid for with the proceeds of the loan. One of the costs is the FHA’s Mortgage Insurance Premium (MIP). The great thing about the Reverse Mortgage is there are no out of pocket costs. One of the other great things is a customer is required to attend mandatory counseling sessions with a trained counselor. These Reverse Mortgage counselors are often certified by the AARP and will ensure the borrower understands the costs of the loan and any other alternatives available. A Reverse Mortgage is a non-recourse consumer loan, meaning the loan payoff can never exceed the value of the home.

Graham McKenzie is the content coordinator for a leading South African leading Home loans and Bond Origination portal which provides access to ABSA Home loans.