The reverse mortgage turns the equity of the home into tax free cash. Reverse mortgage is more of a loan advance. While the borrower lives in the home, the borrower does not repay the loan.
Any senior who is sixty two years or older is eligible for the reverse mortgage. The home must have some kind of equity. And, the home is the primary residence of the borrower. Depending on the mortgage lenders, the mortgage lenders may require single unit, condo, or townhouse.
Reverse mortgage differs from home equity loan. The mortgage lenders pay the borrower the lump sum, regular periodic payment, line of credit, or combination. The line of credit allows the borrower to choose how and when to get payment. The repayment of loan only happens in reverse mortgage when borrower permanently moves, dies, or sells.
Let us compare with traditional mortgage to better understand reverse mortgage. Any type of mortgage creates debt. A debt is the difference between amount own and amount owe. Traditionally, the home equity increases and debt decreases. In reverse mortgage, the home equity decreases and debt increases.
At the time of repayment, the mortgage lenders use the home to repay the loan. The home pays off the principal, interest, and closing costs of reverse mortgage. Anything extra goes to the remaining relatives. In case of deficit, the mortgage lenders make up for the deficit.
Since the borrower retains the title of home on reverse mortgage, the borrower remains the owner of the home. The borrower is responsible for the maintenance, property tax, insurance, and utilities.
The mortgage interests in reverse mortgage are not mortgage interest tax deduction. However, the borrower can claim the mortgage interest on current first and second mortgage. Even though the borrower is still paying off the first and second mortgages, the mortgage lenders can allow the borrower to go on reverse mortgage.
The borrower can owe only on how much is the home. The mortgage lenders can only go after the house to pay off the mortgage. The assets and estate of the borrower are safe from the mortgage lenders. This is more commonly known as non-recourse loan.