A reverse mortgage is a special type of loan used by older Americans to convert the equity in their homes into cash. The money obtained through a reverse mortgage canprovide seniors with the financial security they need to fully enjoy their retirement years
The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of the borrower making monthly payments to a lender, as with a regular first mortgage or home equity loan, a lender makes payments to the borrower. While a reverse mortgage loan is outstanding, the borrower owns the home and holds title to it and does not make any monthly mortgage payments. The money from a reverse mortgage can be used for ANYTHING: daily living expenses; home repairs and home improvements; medical bills and prescription drugs; pay-off of existing debts; education; travel; long-term health care; prevention of foreclosure; and other needs. If your home needs physical repairs (mandatory repairs) in order to qualify for a reverse mortgage, a portion of the proceeds will be set aside for this purpose. To qualify for a reverse mortgage you must be at least 62 and own your own home or condominium. There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. In fact, many senior Americans get a reverse mortgage to pay off their first mortgage. You can choose how to receive the money from a reverse mortgage. The options are: all at once (lump sum); fixed monthly payments (for up to life); a line of credit; or a combination of a line of credit and monthly payments. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time. The size of the reverse mortgage that you can get will depend on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates, and – sometimes – where you live. In general, the older you are and the more valuable your home (and the less you owe on your home), the larger the reverse mortgage can be. The costs associated with getting a reverse mortgage include the origination fee (which can usually be financed as part of the mortgage), an appraisal fee, and other charges similar to those for regular mortgages. The money provided to you from a reverse mortgage is tax-free; it is not income that you must pay taxes on. However, the funds received from a reverse mortgage may affect your eligibility for certain kinds of government assistance, so you should check into this before getting a reverse mortgage. Before applying for a reverse mortgage, you must first meet with a reverse mortgage counselor. You may, however, first approach a reverse mortgage lender, who can provide you with the names of approved counseling agencies in your area. A list of approved counseling agencies nationwide is posted on the Web by the U.S. Department of Housing and Urban Development. The counselor’s job is to educate you about reverse mortgages, to inform you about other alternative options available to you given your situation, and to assist you in determining which particular reverse mortgage product would best fit your needs if you elect to get a reverse mortgage. In general, counseling sessions must be done face-to-face. However, if you are seeking a Fannie Mae reverse mortgage you can do it by telephone. In some areas, telephone counseling may be available for consumers seeking an FHA reverse mortgage (Home Equity Conversion Mortgage). No payments are due on a reverse mortgage while it is outstanding. The loan becomes due and payable when the borrower ceases to occupy their home as their principal residence. This can occur if the senior (the last remaining spouse, in cases of couples) passes away, sells the home, or permanently moves out of the home. The home does not have to be sold to pay off the loan. The borrower (or their borrower’s heirs) can instead pay off the reverse mortgage and keep the home. In any event, the amount owed on the reverse mortgage cannot exceed the value of the home at the time that the loan must be repaid. Moreover, if the home is sold and the sale proceeds exceed the amount owed on the reverse mortgage, the excess proceeds go to the borrower or the borrower’s estate. Reverse mortgages are offered by banks, thrifts, and other financial institutions. Four reverse mortgage products are available to consumers in the U.S. at the present time. In the U.S., the most popular reverse mortgage is the federally-insured reverse mortgage, called the FHA Home Equity Conversion Mortgage Program (HECM). The other major product is the Home Keeper reverse mortgage, which was developed in the mid-1990s by Fannie Mae, a private national mortgage company. A companion product is the Home Keeper for Home Purchase mortgage, which is intended for home purchases. One “jumbo” private reverse mortgage product is offered by Financial Freedom Senior Funding Corp., of Irvine, CA. This is the Cash Account Plan. The HECM and Home Keeper products are available in every state, while Financial Freedom’s product is offered in 21 states and the District of Columbia.
Article courtesy of- Fidelity National Title Insurance.
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