A reverse mortgage is one of the many vehicles that individuals 62 and over can use to convert the equity in their home into cash. However, it is very important for an individual to understand reverse mortgages, their ramifications and alternatives. This article will provide an overview of reverse mortgages, as well as discuss alternatives.
What is a Reverse Mortgage?
With a "normal" mortgage, you pay a monthly amount (principal and interest). With each month, the amount you need to decrease and the equity in your home increases. As can be expected from its name, a reverse mortgage works in the opposite. With a reverse mortgage, you can turn the equity in your home into cash. You do not have to make monthly payments. The money can be paid to you in one or more of the following ways:
- In One Lump Sum
- As a Regular Monthly Amount (Cash Advance)
- As an Account line of credit as needed
With a reverse mortgage, the homeowner continues to own his home and receives money as he sees fit. As they receive money, their loan amount increases, and the equity in their home decreases. A reverse mortgage can not exceed the amount of the home equity. In addition, a lender can not claim the loan payment of anything other than the value of the home. Your other property and the property of your heirs are protected by what is known as a "no-recourse limit".
A reverse mortgage, plus accrued interest, must be repaid. Reimbursement of a reverse mortgage occurs when the last owner of the property named on the loan dies, sells the house or definitely leaves the house. Before that, nothing should be paid on the loan.
There are other circumstances in which reverse mortgage lenders may also require the repayment of a loan before the above conditions.
- The borrower does not pay his property taxes
- The borrower fails to maintain and repair his house
- The borrower fails to keep his home insured
There are also other default conditions that may result in repayment of the loan. Most of them are similar to default conditions for traditional mortgages (for example, bankruptcy, donation or abandonment of the home, fraud or misrepresentation, and more).
A reverse mortgage should not be confused with a home equity loan or a housing equity line, both of which are other ways to get money for equity in your home. With one of these loan vehicles, an individual must pay at least a monthly interest on the amount of the loan received, or the amount they have drawn on their equity line.
Reverse Mortgage Eligibility
All homeowners must apply for a reverse mortgage and sign the appropriate loan documents. To be entitled to a reverse mortgage, the borrower must:
- Owning his own house
- At least 62 years old
A reverse mortgage is most often a "first" mortgage, c & # 39; that is, can not be other mortgages or loans against the property, such as a line of equity. An individual usually owns their home "free and clear" before applying for a reverse mortgage.
Amounts In Reverse Mortgage
The amount of money that a person can receive from a reverse mortgage is a function of several factors, including:
- The Specific Mortgage Program Inverted that the individual chooses
- cash advances received (eg, lump sum or monthly payment)
- The age of the individual (plus an individual is older, more he has money)
- The value of the house of the individual (The more valuable the house is, the more money it receives)
Types of reverse mortgages
It There are several types of reverse mortgages. Some are more expensive than others. Types of reverse mortgages include:
- Reverse mortgages offered by the state and local governments (often called "single purpose reverse mortgages"). These are usually the cheapest reverse mortgages. These can be the most restrictive on how the money received can be used.
- Federal Government Equity Conversion Mortgages (HECM). These are almost always cheaper than other private sector reverse mortgages, but more expensive than reverse mortgages obtained from state and local governments.
- Other private sector reverse mortgages (exclusive).
Alternatives to Reverse Mortgages
Although generally an option that causes a negative emotional reaction, selling a home is an alternative to a reverse mortgage. The proceeds from the sale can be used to either rent or buy a smaller, more "friendly" home, while leftover money can be invested to provide additional income. This option should at least be considered and compared to a reverse mortgage so that a person makes an informed decision.
Reverse Mortgage Counseling
Advice is required to obtain certain types of reverse mortgages. Consulting services are required before a person can obtain federally insured equity conversion mortgages (HECM). Even if a board is not required for a particular reverse mortgage, people who are considering a reverse mortgage should seek either a board or the advice of a qualified financial advisor.
Good Sources of Information on Reverse Mortgages
The American Association of Retired Persons (AARP) is an excellent resource for finding more information on reverse mortgages. Their website (www.aarp.org) contains a lot of information on the subject. Information can also be found on the National Reverse Mortgage Lenders Association website (www.reversemortgage.org), on the HECM Resources website (www.hecmresources.org/index.cfm), on the National Center for Education website. Home Equity Conversion (www.vert.org), and the Federal Trade Commission (www.ftc.gov/bcp/conline/pubs/homes/rms.htm).