Debt And Loans: Reverse Mortgage Basics

Reverse mortgages allow seniors to borrow from their home's equity without requiring them to make a monthly mortgage payment.

Most of us know what a mortgage is. A lender loans you money to purchase a home. In exchange for that money the lender expects that each month you will pay back a certain portion of the principal of that loan, plus a set amount of interest.

In other words, you are expected to make a mortgage payment each month, and at the end of a specified number of months the loan will be paid back, and you will own your house, free and clear.

That concept is fairly easy to grasp.

Stand that concept on its head and you have the basis of a reverse mortgage.

With a reverse mortgage a lender loans you money and charges you interest, just as they would with a forward mortgage. But that's where the similarities end.

With a reverse mortgage you don't make monthly mortgage payments. Instead of your debt becoming less and less with each passing month, with a reverse mortgage your debt grows and grows as time goes on and the loan is only paid back (with interest and other charges) when the last of the borrowers dies, or when the property is sold, or under certain other specified conditions.

For an elderly homeowner, who has made mortgage payments for years and who now has a large cash equity in their property, a reverse mortgage allows that senior to use the cash value of their home for day to day living expenses without any monthly payments on the money.

To qualify for a reverse mortgage loan, all of the borrowers must be 62 years of age or older and the property must be your primary residence. Since you do not make monthly payments on a reverse mortgage, you do not need to have an income to qualify.

The amount of money that a borrower can get with a reverse mortgage depends on several factors. One factor is the age of the borrower(s). The older the borrower(s) the larger the loan. In other words, the longer you wait to take out a reverse mortgage, the more money you are likely to get.

Other factors include the value of the home, the amount of equity in the home, the condition of the property, and the location of the property.

With a reverse mortgage, the homeowner still owns his or her home, the same as they would with a forward mortgage. The homeowner is still responsible for all taxes, homeowner's insurance, and upkeep of the property.

Lenders base their reverse mortgage rates on statistical life expectancy. But what happens if you live longer than the norm? Will the interest payments on your reverse mortgage balloon the amount of payback beyond the value of your home and place an unexpected financial burden on your heirs?

The answer is no. All reverse mortgages have what is called a "non recourse cap." This means that the maximum you can ever owe on a reverse mortgage is the value of your home. You cannot leave your heirs with a reverse mortgage debt that is greater than the value of your home.

A reverse mortgage debt must be paid back if you sell your home or if you must move out of your home for 12 months or longer, or if there is no reasonable expectation that you will live in the home for at least 6 months each year. Failure to pay property taxes or homeowner's insurance or to perform needed maintenance can also cause the loan to be called early. Other early pay-back conditions may apply.

When the time comes, a reverse mortgage can be paid back from the sale of the home, from other sources of cash, or, in many cases, from a standard forward refinance of the property, allowing the home to remain within a family.

Where you get your reverse mortgage can make a big difference. County or state lending agencies make reverse mortgages, but in almost all cases the proceeds from these reverse mortgages can only be used to pay property taxes or to make home improvements.

If you wish to use the cash from your reverse mortgage for everyday living expenses, then you need to get your reverse mortgage from a private lender or you must get an HECM reverse mortgage.

An HECM is a Home Equity Conversion Mortgage. This is the only type of reverse mortgage that is insured by the federal government. HECMs are insured by the FHA (the Federal Housing Administration).

The FHA has guidelines that HECM lenders must follow in determining how much they can lend you, depending on your age and on the value of your home. HECM lenders are also restricted on the amount they can charge you for loan costs - which can be quite high with non-government-insured reverse mortgages.

In almost all cases, HECM reverse mortgages will give you more cash than any other reverse mortgage lenders, and while the fees are not cheap, an HECM mortgage is almost always less costly than any other you can find.

How you take your reverse mortgage cash can make a big difference in how much money you eventually end up with.

You can take your entire reverse mortgage loan as one lump sum cash payment at the time of loan closing. If you choose the lump sum payment be warned that other entitlement programs you are using could be adversely affected. Many government programs, such as SSI, Medicaid and others, require that you do not have more than a certain amount of money in a savings or checking account at the end of each month in order to qualify. A lump sum reverse mortgage payment could make you ineligible for these programs.

Many people choose a credit line account. This allows you to take cash advances only when you need them, and in the amount you need at any given time.

You can also choose to receive a monthly cash advance. Monthly cash advances can be structured to last for a certain number of years, or to continue for as long as you live in your home.

Another slightly more creative option is to use the proceeds to purchase an annuity which will pay you cash for the rest of your life, no matter where you live or how long you live.

Used correctly, a reverse mortgage can be a lifesaver for many seniors, but you should take your time in structuring both your loan and the manner in which the loan proceeds are to be paid in order to get the greatest benefit for your particular situation.

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