How Does a Reverse Mortgage Work?
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A reverse mortgage is a special home equity loan that enables
senior homeowners age 62 and older to tap the equity in their home and defer
repaying the loan for as long as they live in their property.
A reverse mortgage is a logical source of income for many
homeowners who want to tap the equity in their home to improve their quality of
life. The reverse mortgage has no income or credit requirements to qualify. In
general, reverse mortgage lenders offer the homeowner between 30% and
60% of the equity in their home. The amount available varies based on age,
property value, and current interest rates for the six loan programs we offer.
Lenders require that any existing home loans and liens against the
property be paid off. The lender requires that the homeowner continue to pay
their property taxes and homeowner's insurance, and also maintain the property
as their primary residence.
The funds are available to the homeowner as a lump sum or a credit
line that can be tapped at any time. Also, with some programs, the homeowner
can receive a monthly payment stream from the lender. Only when money is
withdrawn does the withdrawn amount count against the loan balance and begin to
accrue interest.
The balance grows over time, as the borrower does not make any
payments on the loan. In some cases, it is possible that the loan balance will
end up exceeding the value of the property. Even if the loan balance does end
up exceeding the property value, or if the borrower has exhausted all of the
available funds, the borrower can NEVER be forced to sell the home.
Additionally, when the loan does finally become due, the lender is
only secured to the real property. Thus, the lender can only look to the value
of the real estate for repayment of the loan and not any other asset in the
borrower's estate. Furthermore, neither the borrower nor the borrower's estate
will be subject to any claim that may arise if the value of the property is
less than the payoff of the loan. FHA insurance will cover any balance due the
lender.
With today's programs, the homeowner and their family retains
ownership of the home. If the borrower decides to sell the property, the
balance of the loan is due and payable. Any remaining equity passes through to
the borrower, as is the case with a regular or home equity loan. The borrower
will never be forced to sell the property.
Am I Eligible for a Reverse Mortgage?
This type of loan is available to homeowners that are age 62 and
older. Eligible properties include single-family homes, condominiums, planned
unit developments, and owner-occupied 2-, 3-, and 4-flats. The property must be
the homeowner's primary residence and all existing liens must be paid off at
the time of settlement.
As an additional safeguard, the Department of Housing and Urban
Development (HUD) requires that each potential borrower attend a counseling
session with an independent HUD-approved counseling agency. This counseling is
free of charge to the borrower and in most cases can be done via phone.
How Does a Reverse Mortgage Differ From A Conventional Home
Equity Loan?
The key difference is that home equity loans require regular
monthly payments in order to repay the loan. These payments begin as soon as
the loan is settled. Reverse mortgages do not require repayment for as long as
the home remains the senior's primary residence. In other words, the loan
becomes due only when the senior no longer occupies the property.
The second key difference is that home equity loans are based on
the borrower's income and credit history. Many seniors living on a fixed income
do not qualify for low-interest-rate loans due to poor credit. These homeowners
had nowhere to turn until now. In contrast, reverse mortgages are based on the
property value, age of the borrower(s) on the title, and the applicable
interest rate for the particular loan program.
What Are Some of the Common Uses of Reverse Mortgages?
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Pay off existing loans or other debts,
freeing up monthly cash flow and reducing 'cost of borrowed money'
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Perform home improvements, making the home livable for
an extended period of time
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Pay for in-home health care, avoiding a nursing home
for as long as possible
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Purchase long-term care insurance, guaranteeing that
the homeowner maintains independence as long as possible
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Purchase life insurance, increasing the benefit passed
to heirse
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Plan the homeowner's estate, ensuring that the
homeowner's wishes are honored and also maximizing benefits to heirs
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Funding an annuity or other financial instrument,
improving the homeowner's overall financial health
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States in Which We Offer Reverse Mortgages:
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