Reverse mortgages, once an unusual method of financing, have moved into the mainstream as the boomer generation reaches retirement age. Widely touted by such venerable organizations as the AARP and often insured by the federal government, reverse mortgages have acquired a great deal of respectability. Also called a Home Equity Conversion Mortgage or HECM, a reverse mortgage can be the answer to many financial problems that seniors face, but similar to any other type of loan, there are advantages and pitfalls. It is important to understand exactly what a reverse mortgage is and is not before making a decision about whether or not to take out a reverse mortgage on a home.
What is a reverse mortgage?
A reverse mortgage is a loan secured by a piece of property. It is only available to owners who are at least 62 years of age and who meet certain requirements. The biggest advantage to a reverse mortgage over other types of mortgages is that repayment of the loan is delayed until the qualified original borrowers are no longer living in the home. It is a way for homeowners to take advantage of the equity they have built up in their homes without selling it.
How does a reverse mortgage work?
The main idea behind reverse mortgage loans is relatively basic. Many senior citizens have built up considerable equity in their homes. A reverse mortgage allows a homeowner to take advantage of the equity built up in the home without having to sell or leave the home.
In a reverse mortgage, the bank agrees to make a loan to a homeowner based on factors that include the age of the homeowner, the current interest rate and the value of the home. The homeowner has several options for receiving the money from the loan, including lump sum, line of credit or monthly payments. The homeowner also retains the right to remain in the home for the remainder of his or her life. There are no payments due on the loan as long as one of the original borrowers continues to live in the home. When the last remaining borrower leaves the house, the loan may be paid off by selling the house, or by refinancing the mortgage into a conventional loan.
What are the requirements for a reverse mortgage?
The requirements to qualify for reverse mortgages vary somewhat depending on the state and the lender, but, for example, reverse mortgages that are insured by Fannie Mae have the following requirements:
1 All persons named on the title to the property must by at least 62 years old.
2 The property must be the primary residence of at least one person on the title.
3 The borrower must own the property outright, or have a small remaining mortgage balance that can be paid off with the proceeds of the reverse mortgage.
4 None of the borrowers may have any outstanding federal debt – i.e., no student loans or outstanding income taxes.
5 Borrowers must participate in a consumer information session given by an approved reverse mortgage counselor.
What kind of property can be used for a reverse mortgage?
The property that is secured by the reverse mortgage must be the primary residence of the borrower, and the borrower must occupy it at least six months out of the year. In addition, the home must be one of the following:
5 Single family detached residence
6 1- 4 family housing unit with owner occupying at least 1 unit
7 HUD-approved condominium unit
8 FHA-approved manufactured home
How much money can be borrowed on a reverse mortgage?
The amount of a reverse mortgage is determined based on the age of the youngest borrower, the current prevailing interest rate and the amount of equity the homeowner holds in the home. Older homeowners will be able to borrow more than younger borrowers.
What fees are associated with a reverse mortgage?
There are several fees associated with taking out a reverse mortgage. They include:
9 an origination fee of up to $6,000
10 standard loan closing costs, including appraisals, inspections, credit checks, mortgage taxes and title insurance
11 Mortgage insurance equal to 2% of your home’s value or the FHA’s limit for your area, plus .5% monthly insurance premium
12 Servicing fee through the life of the loan
How can the money from a reverse mortgage be spent?
There are no restrictions on how a borrower spends the proceeds of a reverse mortgage. Many homeowners use monthly payments from their reverse mortgage to supplement income. Others set up a line of credit on which they can draw for extraordinary expenses, or take a lump sum payment for investment purposes or to pay for a large capital expense. Still others use a reverse mortgage as a wealth management tool to reduce estate taxes, or use the money for leisure and retirement expenses.
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