What Is A Reverse Mortgage
A reverse mortgage, also called Home Equity Conversion Mortgage (HECM), is available to homeowners who are at least 62 years of age or are within three months of their 62nd birthday.
The owner can use the equity in his home to get money from a lender. In a reverse mortgage, the lender pays the home owner and borrower does not have to pay anything back.
The money is recovered by the lender by the sale of the home when the lender moves out or his demise occurs.
A reverse mortgage in the US is governed by the US Department of Housing and Urban Development.
Who Can Qualify For A Reverse Mortgage
In order to qualify for a reverse mortgage:
- You must be in 62 years of age or more or be within three months of your 62nd birthday.
- You must either have a free hold on your home or have a low mortgage balance remaining that can be paid off easily with the reverse.
- There must be built up equity in your home which is sufficient to justify a reverse mortgage.
- You must live in your home which can be a single family home or a 1 to 4 unit home as long as at least one unit is occupied by the borrower. HUD approved condominiums and Manufacturing homes that meet FHA requirements are also eligible.
- You must receive compulsory counseling from an approved HECM ( Home Equity Conversion Mortgage) counselor before signing on the contract. You can contact the housing counseling at (800) 569 42874 and get contact names and numbers of HUD approved counseling agencies and a list of FHA approved reverse mortgage lenders in your area.
In spite of off a list of approved councilors being available you must ensure that you are given complete information because the counselling is not always upto the mark.
How Is The Money Received
A new loan is taken out by the mortgage lender for an amount depending upon the value of the home. Any existing mortgage on the home is paid off and any necessary repairs on the house are executed.
The remainder of the money is given to the borrower either as a lump sum payment, as regular monthly payments or as a line of credit or as a combination of any of the above three methods.
The remittance of the reverse mortgage to the borrower can be made is one of many ways:
- Through a one time lump sum payment.
- Through a Line Of Credit that allows the borrower to borrow from an account as per his needs till the credit limit is exhausted.
- Tenure – Regular monthly payments to the borrower till the time that the mortgage contract is in force that usually ends with either the borrower moving out of the home or his demise.
- Term – Regular monthly payments to the borrower for a fixed period of time.
- Modified Tenure – A combination of Line of Credit as well as fixed monthly payments till the termination of the mortgage contract.
- Modified Term – A combination of line of credit and fixed monthly payment for a fixed period of time.
How Much Can You Borrow
The amounts that a person can borrow on a reverse mortgages calculated based upon several factors such as:
- the area of residence
- existing loans and liens
- age of the youngest borrower
- as well as the value of the home.
- in some circumstances federal housing administration will limit the amount to be borrowed according to its guidelines.
Also, before the amount to be financed can be calculated, the house will be evaluated and expenses for necessary repairs will be deducted, if required.
A majority of reverse mortgage loans work on an adjustable rate mortgage where the interest rate is adjusted either monthly or annually.
You need compulsory counselling before you can sign up for a reverse mortgage contract.
You can obtain local lists of counsellors approved by the US Department of Housing and Urban Development by calling 1-800-569-4287.
How Is The Money Paid Back
You only have to pay the money back in case you move out of the house or decide to sell the house. In case of your demise, the lender will use the proceeds from the sale of the property to recover his lending.
Whatever is in excess after the payment will pass on to your heirs.
The mortgage lender is not allowed to go after the heirs and their assets or their inheritance if he cannot recover the money of the reverse mortgage from the sale of the home.
Since the reverse mortgage is backed by HUD, HUD covers the difference if a short sale occurs and the mortgage lender is not allowed to go after the heirs and their inheritance for the recovery of his debt.
Many times the next of kin of the home owner take out a life insurance policy. In the event of the owner’s demise the benefit received from the insurance policy is used to pay back the money taken from the lender as reverse mortgage.
This way parents can ensure that their children still get to inherit their home in spite of the money taken against a reverse mortgage.
What Is The Difference Between Reverse Mortgage and Home Equity Loan
The major difference between the two is that with a reverse mortgage you do not have to make any payments back to the lender, apart from some insurance or maintenance fee. You only pay the lender if you move or sell the house. In case of your demise the money owed is recovered from the estate, unless you next of kin pays it off.
A home equity loan or a second mortgage requires you to make monthly payments for the sum borrowed. So while you get a lump sum, and you have to start returning it immediately.
People imagine that they will invest the amount they get from the 2nd mortgage and pay off the instalments with the interest they earn. Two things usually go wrong with this idea. First, you will find it difficult to earn more interest on your investment than the mortgage rate of interest. Secondly, you are probably taking a 2nd mortgage because you need money for some expense, perhaps even a major expense like a marriage or child’s college education.
This dwindles the amount you borrow and there might very little left to invest.
With reverse mortgages you can choose to get paid in several different formats and do not really have to worry about spending it for any important expense.
Cost Of Taking A Reverse Mortgage
HECM Costs: You can always finance the costs of the reverse mortgage/HECM. The costs of the loan are rolled up in to the mortgage and the borrower does not have to pay anything. However, the financing the costs of the reverse mortgage reduces the amount that you are eligible for from the HECM.
The HECM loan includes several fees, including an origination fee, closing costs, mortgage insurance premium, interest and servicing fees.
Service Charges: A mortgage lender provides services through the tenure of the reverse mortgage. A monthly fee may be charged by the lender for the purpose of distributing the payments and keeping the mortgage in compliance through home maintenance, insurance and tax payment. HECM lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate and $35 if the interest rate adjusts monthly.
Upfront Mortgage Fee: There is a cost that is specific to reverse mortgages. Its called upfront mortgage fee. This fee is calculated at the rate of 30 or $35 a month for the projected lifespan of the youngest borrower.