What is a Reverse Mortgage?
A reverse mortgage is a loan available to homeowners who are 62 years or older that enables them to convert part of the equity in their home into cash.
The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction for how reverse mortgages proceeds can be used.
The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.
You are not required to pay back the loan until the home is sold or otherwise vacated. As long as you live in the home, you are not required to make any monthly payments towards the loan balance, but you must remain current on your property taxes, homeowners insurance and condominium fees (if you live in a condo).
Borrower Requirements and Responsibilities
- Age qualification: All borrowers listed on title must be 62 years old.
- Primary lien: A reverse mortgage must be the primary lien on the home. Any existing mortgage must be paid off using the proceeds from the reverse mortgage (Reverse mortgage proceeds can be used).
- Occupancy requirements: The property used as collateral for the reverse mortgage must be the primary residence. Vacation homes and investor properties do not qualify.
- Taxes and Insurance: You must remain current on your real estate taxes, homeowners insurance, and other mandatory obligations, including condominium fees, or you are susceptible to default.
- Property Condition: You are responsible for completing mandatory repairs and maintaining the condition of the property.
Conveyance of the mortgaged property by will or operation of law to the estate or heir after mortgagor’s death: When a reverse mortgage becomes due and payable as a result of the borrower’s death and the property is conveyed by will or operation of law to the estate or heirs (including a surviving spouse who is not on the title and therefore not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.
Features of Reverse Mortgages
With a reverse mortgage, you always retain title or ownership of the home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.
The amount of funds that a person is eligible for depends on his age (or, in the case of couples the age of the younger spouse), the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you may receive.
There is a limit on the amount of funds you can access during the initial year. If you are eligible for a $100,00 loan, for example, you can take $60,000, or 60 percent of that sum. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceed the 60 percent limit. You must pay off these “mandatory obligations” as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount- in which case that’s an $10,000, or 10 percent of $100,000.
Loan proceeds can be taken as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.
Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and maybe a charge for counseling depending on the counseling organization you work with. Together, these two fees will total a few hundred dollars. Very low-income homeowners are exempted from being charged for counseling.
When you ultimately pay off the loan, the final balance equals the amount of funds borrowed, plus annual mortgage insurance premiums, servicing fees and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time you make a payment. A reverse mortgage is an empty balloon that grows larger as time passes.
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