How a Reverse Mortgage Can Benefit Homeowners 62 or Older
Reverse mortgages give eligible homeowners the ability to access the money they have stored up as equity in their homes. They are designed to build seniors’ personal and financial independence by providing funds without the requirement of a monthly payment for as long as they live in the home.
Homeowners age 62 or older may benefit greatly by discussing the possibilities and options a reverse mortgage can afford them with a lender or counselor. These types of loans offer a way to borrow against the equity in your home to create a stable, continuous and tax free source of usable income or a substantial source of supplemental income, all without having to change your current living conditions.
The best part of this type of loan is that you aren’t required to repay any part of the loan as long as you live in your house and don’t breach any of the terms and conditions of the reverse mortgage. However it is important that you are diligent in researching this unique loan product as it may not be right for every situation. This is why we encourage any potential borrower interested in a reverse mortgage to investigate their options first with a HUD certified counselor or lender.
Other great sources of information include family and friends who have experience dealing with reverse mortgages before, nonprofit organizations offering help to seniors’, the AARP, American Society on Aging, and authority sites on the internet that provide helpful articles and resources concerning the reverse mortgage industry.
While simple to understand in theory, it is important to know how reverse mortgages work. The reverse mortgage loan product got its name due to the fact that instead of making mortgage payments, the lender actually pays the borrower creating a kind of inverse relationship compared to the traditional mortgage product. The source of funds for the money received is the equity stored in your home. The unique feature of this loan is that unlike conventional mortgages where the loan balance becomes smaller each moth you make a payment, the loan balance of a reverse mortgage grows larger over time.
The principal on the loan increases with each payment received, this includes interest and other charges accrued each month on the total funds advanced to you. You retain ownership of your home in all reverse mortgages, and many do not require repayment for as long as you occupy your home, pay your property taxes and hazard insurance charges, and continue to maintain the property.
When you leave your home permanently your loan balance becomes due. It is also important to note that your legal obligation to repay the loan cannot be more than the market value of your house at the time you leave the property. This means that your lender can never require repayment of the loan from your heirs or from any asset other than the property itself.
Today the 2 major reverse mortgage loan types provided by the Fannie Mae (Federal National Mortgage Association) are the HECM and Home Keeper. These loans assure the borrower that he or she will never owe more than the loan balance or the value of the property, whichever is less, and no assets other than the home must be used to repay the debt.
Also unlike conventional mortgages these loan types have neither a fixed maturity date nor a fixed mortgage amount. Many borrowers familiar with the home equity loan are often times skeptical about reverse mortgages and simply see it as a different type of home equity loan and sometimes even think it’s a scam.
For this reason it is important to understand the difference between home equity loans and reverse mortgages. With a HELOC (Home Equity Line of Credit) you must make regular monthly payments to the lender in order to repay the loan, in fact, your repayments begin as soon as your loan is made. If you fail to make the monthly payments on a traditional home equity loan, a mortgage lender can foreclose on your home, putting you in a position where you either have to sell your home to repay the loan or lose it to the lender.
Another notable difference is the fact that some home equity loans also require you to re-qualify for the loan each year, and if you fail to re-qualify, the lender may require you to pay the loan in full immediately. In addition, in order to qualify for a traditional home equity loan, you must have sufficient funds and debt-to-income ratio in order to be approved on the loan.
Reverse mortgages however, such as the HECM and the Home Keeper Mortgage, do not require monthly repayments, saving you from the need to qualify through the traditional and often times difficult loan process. In fact, repayment of these loans is not required as long as your property remains your primary residence and you stay current in paying your property taxes and hazard insurance charges. Another stipulation that makes the reverse mortgage so special is the fact that your income does not become a factor in qualifying for these loans, nor are you required to re-qualify each year.