Reverse Mortgage Explained
What is reverse mortgage?
Commonly referred to as a home equity conversion mortgage (HECM), a reverse mortgage is a special type of loan that can only be accessed by senior homeowners (usually 62 years and above). This type of loan allows senior homeowners to convert part of the equity in their homes into cash. The best part of this retirement plan is that the responsibility of the homeowner to repay the loan may be postponed until they pass away, sell, or move out of the home. However, borrowers of this kind of loan have the responsibility to pay homeowner’s insurance and property taxes
How It Works
With a reverse mortgage, the owner does not have to make monthly payments while the cash may be paid to him or her in any of the following ways:
- As a single lump sum payment
- As a credit line account that the owner draws upon as needed
- As cash advance (regular monthly payment)
Homeowners will continue to own their homes while receiving cash in whatever way is preferable to them. As they receive the cash, the amount of their loan increases while the equity in their home declines. It is worth noting that a reverse mortgage cannot exceed the amount of the equity of the home or house. Additionally, the borrower cannot make payment of this type of loan with anything other than the value of the home. All other assets including those of their heirs are protected by what is normally referred to as a “non-recourse limit”.
There are some instances in which lenders may require repayment of a loan prior to the above mentioned conditions. Such circumstances include:
- In case the borrower fails to his or her property taxes
- The homeowner fails to insure the house
- The borrower fails to repair or maintain his or her home
Additionally, there are other default conditions that may require an early repayment of the loan. These conditions are similar to those of the regular mortgages such as abandonment or donation of the home, declaration of bankruptcy, perpetration of fraud, etc.
More Information on Reverse Mortgages
Eligibility: As with any other type of loan, the applicant must sign relevant loan papers. In order to qualify for this special borrower must:
- Own the home in question
- Be at least 62 years old or above
A reverse mortgage is usually a “first” mortgage. This means that there cannot be any other loan or mortgage against the property.
Types: There are numerous types of reverse mortgages; some are more affordable, while others can be very expensive. The various types of this special loan include:
- Reverse mortgages offered by state and local governments (commonly referred to as “single purpose reverse mortgages”). These are usually the most affordable (least expensive) mortgages. However, they may be restrictive on how the cash received can be used.
- Federally Insured Home Equity Conversion Mortgages (HECM). These are typically less expensive than other reverse mortgages offered by other private sectors, but more expensive than those offered by state and local governments.
- Other proprietary (private sector) reverse mortgages
- Prior to settling for any given type of reverse mortgage it is always recommendable to seek counseling or advice of a qualified financial advice.