The term reverse mortgage is everywhere these days. It often appears in commercials or appears in Internet searches. But you may not understand what exactly it is.
In short, it is a unique home loan that allows homeowners to convert some of their home equity into cash. This money that the homeowner earned over years of making payments on their home can now be returned to them in installments. In a typical mortgage case, the borrower pays the lender and each payment reduces the amount owed and builds up the borrower’s equity in the home. In a reverse mortgage, the borrower receives payments from the lender, and each payment increases the loan balance and decreases the amount of equity.
Who originates these loans?
Most of these loans are created by the Federal Housing Administration (FHA) and are known as a Home Equity Transfer Mortgage, or HECM. HECM is guaranteed by the FHA, so the borrower does not have to worry about not receiving payment from the lender.
Who qualifies for these loans?
To qualify for this type of loan, homeowners must be 62 or older and have a significant equity in their home. In addition, to obtain a HECM, homeowners must either own their home outright or the balance they owe on their home must be low enough that it can be paid off with the proceeds of the reverse loan at closing. In addition, the borrower must reside in the home and be able to pay the recurring fees associated with the property including taxes and insurance. Finally, before obtaining a loan, borrowers must receive information from a HECM advisor. The applicant’s home must be a single-family home, HUD-approved condominium or manufactured home that meets FHA requirements, or a two- to four-unit home if the borrower resides in one of the units.
How much can you borrow?
The amount a homeowner can borrow with a reverse mortgage varies depending on the age, the value of the home, and the interest rate on the loan. In most cases, older homeowners are able to borrow more money, and the higher the value of the home or the more equity the owner has, the more the owner is able to borrow. Lower interest rates on loans also increase the homeowner’s borrowing ability.
How do I receive my money?
With HECM, borrowers have several options for how they receive their payments. Borrowers can choose to have a single payment at the closing of the loan or the borrower can take a line of credit. This line of credit can be used when the borrower chooses and grows over time. The borrower can also choose to receive payments in the form of a monthly annuity. Monthly EMI is a monthly payment that the borrower receives for the duration of his stay in the home. The term monthly annuity is a monthly payment that the borrower receives for a specific period of time that he chooses. Borrowers can also choose to combine these options, for example by choosing to take out an annuity while also taking some cash out at closing. By paying a small fee, borrowers can also switch from one option to another.
A reverse mortgage can be a useful source of income for seniors. By researching the pros and cons of this type of loan, homeowners can determine if it is suitable for their financial situation.