What is a Reverse Mortgage?
A reverse mortgage is a special type of loan used by older
Americans to convert the equity in their homes into cash. The
money from a reverse mortgage can provide 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 making monthly payments to a lender,
as with a regular first mortgage or home equity loan, a lender
makes payments to you.
While a reverse mortgage loan is outstanding, you continue to
own the home and hold title to it.
The money from a reverse mortgage can be used for ANYTHING:
daily living expenses; home repairs and home modifications;
medical bills and prescription drugs; pay-off of existing debts;
continuing 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.
Qualifications
To qualify for a reverse mortgage you must be at least 62 and
own your own home. 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
seniors get a reverse mortgage to pay off a 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 these.
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.
Loan Size
The size of the reverse mortgage that you can get depends 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.
Loan Cost
The costs associated with getting a reverse mortgage include the
origination fee (which can 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,
and does not affect regular Social Security or Medicare
benefits. However, the funds received from a reverse mortgage
may affect your eligibility for certain kinds of government
assistance, such as Medicaid or state assistance programs, 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.
The counselor's job is to educate you about reverse mortgages,
to inform you of other alternative options available to you
given your situation, and to assist you in determining which
particular reverse mortgage product best fits your needs.
In general, counseling sessions are done face-to-face, although
telephone counseling is becoming more prevalent.
No payments are due on a reverse mortgage while it is
outstanding. The loan becomes due and payable when you cease to
occupy your home as a principal residence. This can occur if you
(the last remaining spouse, in cases of couples) pass away, sell
the home, or permanently move out.
The home does not have to be sold to pay off the loan. You (or
your heirs) can pay off the reverse mortgage and keep the home.
In any event, the amount owed on the reverse mortgage can never
exceed the value of the home at the time the loan must be
repaid. Moreover, if the home is sold and the sales proceeds
exceed the amount owed on the reverse mortgage, the excess money
goes to you or your estate.
Reverse mortgages are offered by banks, mortgage companies, and
other financial institutions.
Three reverse mortgage products are available to consumers in
the U.S. at the present time, and one product in Canada.
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, developed in the mid-1990s by
Fannie Mae, a private national mortgage company. Another option
is a "jumbo"
private reverse mortgage product, "The Cash Account". It is designed to accommodate
seniors living in higher-priced homes.
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