What Is Reverse Annuity Mortgage

Aug 18, 2022 | Mortgage Guides

A reverse annuity mortgage is a loan that allows borrowers to turn their home equity into cash without making monthly mortgage payments. This type of loan is reserved for individuals at least 62 years old and is often utilized by retirees seeking an additional source of income. These loans might be an advantageous financial choice for certain borrowers. 

‍Discover how reverse annuity mortgages operate and what they entail. The following guide will assist in those matters.

How a Reverse Annuity Mortgage Works

For many pensioners, their sole financial asset is their residence. Using it as a source of income is plausible for those with limited resources. People considered rich in assets, meaning they hold a lot of home equity, can use a reverse annuity mortgage to turn it into a cash income.

‍By relinquishing the equity in their home, borrowers have a few options. They can exchange it for a lump sum, a line of credit, or through a series of payments, with the latter being considered a reverse annuity mortgage. Therefore, it’s an annuity set up from the proceeds of a reverse mortgage loan. The property remains in the borrower’s name while they receive consistent payments until they no longer live there.

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Different Types of Reverse Annuity Mortgages

There are three to consider:

Single-Purpose Reverse Mortgage

These loans are qualifiable for low—and moderate-income households. They’re often provided by state or local government agencies but are not available in all states. Nonprofit organizations can be another source. A single-purpose reverse mortgage is a loan for one purpose, such as property taxes, homeowners insurance, or repairs and improvements.

Proprietary Reverse Mortgage

A proprietary reverse mortgage is a private loan insured by a private lender, often an organization or company. These loans allow homeowners to convert some home equity into cash. Since they are not federally insured, proprietary mortgages can sometimes provide more than the government’s limit. Private loans benefit those with high-appraised properties and small mortgages, as they qualify for significant advances.

Home Equity Conversion Mortgage (HECM)

Home equity conversion mortgages (HECM) are reverse loans insured and regulated by the U.S. Department of Housing and Urban Development (HUD). HECM loans are often more expensive, particularly with higher upfront costs; however, they are not limited to any one purpose. Several variables affect how much one can borrow with a HECM reverse mortgage. Generally, the more equity you have in a property and the less you owe, the more money you can qualify to take out.

The Pros & Cons of a Reverse Annuity Mortgage

Those struggling to meet financial means can look into a reverse mortgage to stay afloat. Alas, before doing so, they should consider the risks just as one would the benefits.

Pros of a Reverse Annuity Mortgage

  • You Do Not Have to Repay the Loan: Repayment is settled through selling the property when you relocate or after your passing. You are not required to make payments as long as you live on the property. Lenders can void that clause if you do not maintain the estate or pay the taxes.
  • Prevents Downsizing: Most pensioners prefer not to move. While that can benefit some homeowners, it is not necessary with a reverse mortgage.
  • Guaranteed Payout: You will not outlive the income from a reverse mortgage because the insurance company bases the annuity’s price on your age from the beginning of the loan and arranges for the payout. Those with spouses can consider joint-and-last-survivor annuities, which offer a steady income up until you and your spouse pass away.
  • Not Responsible for Costs Exceeding the Home Value: Reverse mortgages are non-recourse loans. Therefore, neither you nor your family is responsible for the mortgage amount if it exceeds your house’s value. If the property’s value increases, refinancing the reverse mortgage to boost the payment is an option.
  • There Are No Stipulations on How the Money Is Used: The funds can go toward paying taxes, health care costs, home renovations, improving one’s savings account, or other needs.

Cons of a Reverse Annuity Mortgage

  • Must Live in the Home: Borrowers must live in the property to prevent the reverse mortgage from being nullified and facing foreclosure.
  • Still Responsible for Home Expenses: With a reverse annuity mortgage, the property title remains in the borrower’s name, and they still pay the property taxes, homeowners insurance, maintenance, utilities, and other costs. The lender may require repaying the loan if you fail to sustain these payments.
  • Interest Payments Are Taxable Income: Interest accrues as it grows. As a result, the loan could exceed the remaining equity.
  • Potential Reductions on Other Benefits: Medicaid and Supplemental Security Income (SSI) consider reverse annuity mortgages as income. As a result, borrowers collecting SSI benefits might face a decrease in their payments. Annuity income can sometimes even exclude borrowers from being eligible for Medicaid.
  • Property Gets Sold Upon the Homeowner’s Death: Reverse annuity mortgages use the home’s equity loan to increase income and use the home’s value to repay the loan once the borrower vacates the property. The house is sold, and descendants of the borrower do not have exclusive rights unless they purchase it.

Who is a Reverse Annuity Mortgage Appropriate For?

Reverse annuity mortgages can be a great source of income. The best candidates have either paid off their home or are close and do not want to sell it or move. Note that these loans do not allow borrowers to bequest the property to their heirs. Consider a reverse annuity mortgage if it suits your current financial needs and goals.

To learn more about what home loan options are available to you, connect with a Wesley Mortgage representative today.

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