For some farmers and others in agribusiness, their property and the sum total of their equipment would be considered their most valuable asset. But, for many, the primary residence will be the largest investment and the most valuable asset. Because of this, some homeowners attempt to convert the equity they’ve built in their home into cash. One way to do this is to receive a reverse mortgage, and it is becoming more popular with senior citizen homeowners.
A reverse mortgage is similar to a home equity loan (aka “second mortgage”), except that a home equity loan requires monthly repayments on the loan. In a reverse mortgage, however, the homeowner does not have to pay back the loan until he or she dies, or sells the home. Also, in a reverse mortgage, the method of payout can vary: Recipients can choose to receive the entire amount in one lump sum, monthly installments, or have the funds placed in a credit line, in which the money can accrue interest.
Qualifications for Home Equity Conversion Mortgage (HECM)
1. Be at least 62 years of age.
2. Own their home and have lived in it for at least one year.
3. Have received free counseling by an agency that has been approved by HUD (Housing and Urban Development).
“A reverse mortgage is a great help to many senior citizens, although it is not for everyone,” said Alisha Cersovsky, a certified credit and reverse mortgage counselor with Credit Counseling of Arkansas. “My job as a counselor is not to encourage or discourage the client from getting the loan, it’s to help them think through their options, and help them see the pros and cons for their specific situation.”
One of the pros that Cersovsky and others mention when it comes to HECM is that the homeowner’s credit status and income are not factors in either the approval process or the interest rate of the loan. The overall amount of the payout depends on the specific program, the value of the home, and even the homeowner’s age. The interest rates for HECM loans are adjustable, and are tied to the U.S. Treasury Security rate.
As Cersovsky alluded to, there are many things to consider before applying for a reverse mortgage. There are certain tax consequences that may accompany reverse mortgages, and the payout could affect a person’s eligibility for public programs such as Medicaid. Also, the reverse mortgage payment has costs associated with it – including origination fees, third-party closing costs, servicing fees, and others – that can decrease the net payout to the homeowner.
So, if you think a reverse mortgage is a worthwhile proposition, make sure you consult a professional to help you make an informed decision about your biggest investment.
Mary Catherine Horcourt is with Credit Counseling of Arkansas.