Reverse
Mortgage
A
reverse mortgage is a special type of loan made to
older homeowners to enable them to convert the equity
in their home to cash to finance living expenses,
home improvements, in-home health care, or other needs.
With
a reverse mortgage, the payment stream is "reversed."
That is, payments are made by the lender to the borrower,
rather than monthly repayments by the borrower to
the lender, as occurs with a regular home purchase
mortgage.
A
reverse mortgage is a sophisticated financial planning
tool that enables seniors to stay in their home --
or "age in place" -- and maintain or improve their
standard of living without taking on a monthly mortgage
payment. The process of obtaining a reverse mortgage
involves a number of different steps.
The
first, most widely available reverse mortgage in the
United States was the federally-insured Home Equity
Conversion Mortgage (HECM), which was authorized in
1987.
A
reverse mortgage is different from a home equity loan
or line of credit, which many banks and thrifts offer.
With a home equity loan or line of credit, an applicant
must meet certain income and credit requirements,
begin monthly repayments immediately, and the home
can have an existing first mortgage on it. In addition,
there is no restriction on the age of borrowers.
In
general, reverse mortgages are limited to borrowers
62 years or older who own their home free and clear
of debt or nearly so, and the home is free of tax
liens.
Borrowers
usually have a choice of receiving the proceeds from
a reverse mortgage in the form of a lump-sum payment,
fixed monthly payments for life, or line of credit.
Some types of reverse mortgages also allow fixed monthly
payments for a finite time period, or a combination
of monthly payments and line of credit. The interest
rate charged on a reverse mortgage is usually an adjustable
rate that changes monthly or yearly. However, the
size of monthly payments received by the senior doesn't
change.
Some
reverse mortgage products also involve the purchase
of an annuity that can assure continued monthly income
to the senior homeowner even after they sell the home.
The
size of reverse mortgage that a senior homeowner can
receive depends on the type of reverse mortgage, the
borrower's age and current interest rates, and the
home's property value. The older the applicant is,
the larger the monthly payments or line of credit.
This is because of the use of projected life expectancies
in determining the size of reverse mortgages.
Seniors
do not have to meet income or credit requirements
to qualify for a reverse mortgage.
Unlike
a home purchase mortgage or home equity loan, a reverse
mortgage doesn't require monthly repayments by the
borrower to the lender. A reverse mortgage isn't repayable
until the borrower no longer occupies the home as
his or her principal residence.
This
can occur if the sole remaining borrower dies, the
borrower sells the home, or the borrower moves out
of the home, say, to a nursing home.
The
repayment obligation for a reverse mortgage is equal
to the principal balance of the loan, plus accrued
interest, plus any finance charges paid for through
the mortgage. This repayment obligation, however,
can't exceed the value of the home.
The
loan may be repaid by the borrower or by the borrower's
family or estate, with or without a sale of the home.
If the home is sold and the sale proceeds exceed the
repayment obligation, the excess funds go to the borrower
or borrower's estate. If the sales proceeds are less
than the amount owed, the shortfall is usually covered
by insurance or some other party and is not the responsibility
of the borrower or borrower's estate. In general,
the repayment obligation of the borrower or borrower's
estate can't exceed the value of the property.
In
general, a borrower can't be forced to sell their
home to repay a reverse mortgage as long as they occupy
the home, even if the total of the monthly payments
to the borrower exceeds the value of the home.
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