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What is a Reverse Mortgage?
A reverse mortgage is a special type of loan used by older Americans to convert the equity in their homes into cash.
The money obtained through a reverse mortgage can provide seniors with the financial
security they need to fully enjoy their retirement years.
The reverse mortgage is properly named because the payment stream
is reversed. Instead of the borrower making monthly payments to a lender, as with a regular first mortgage
or home equity loan, a lender makes payments to the borrower. A reverse mortgage loan is just like a
conventional mortgage the borrowers own their homes and hold title to them and the banks own liens against the properties.
But unlike a conventional mortgage, borrowers do not make any monthly mortgage payments while they are alive and
occupying their homes.
How Does a Reverse Mortgage Work?
The borrower typically chooses from three payment options:
1) one lump sum in cash,
2) equal monthly payments for as long as both borrowers live in the home, or
3) equal monthly payments over time. Repayment is not required until both borrowers move, sell their home, or are deceased.
At that time, the lender may exercise its security interest and foreclose on the property or the owner or the heirs of the owner may pay the lien off.
Naturally, heirs may object to a reverse mortgage for that reason.
Like any other loan, a reverse mortgage accrues interest charges, beginning when the first payment is made to the borrower. Usually a reverse mortgage is an Adjustable Rate Mortgage (ARM), with interest compounded monthly.
Who Can Qualify for a Reverse Mortgage?
In principle anyone can qualify. The borrower must be 62 or older. There is no credit check or income test to qualify.
In order to qualify for a reverse mortgage the borrower must be a homeowner,
62 years of age or older; own your home outright, or have a low mortgage balance
that can be paid off at the closing with proceeds from the reverse loan;
Your home must be a single family dwelling or a two-to-four unit property that you own and occupy.
Townhouses, detached homes, units in condominiums and some manufactured homes are eligible.
Condominiums must be approved.
The home must be in reasonable condition, and must meet minimum property standards.
In some cases, home repairs can be made after the closing of a reverse mortgage.
How to Receive Money from a Reverse Mortgage
The money from a reverse mortgage can be used for anything: daily living expenses,
home repairs and home improvements, medical bills and prescription drugs, payoff of existing debts,
education, travel, long term health care, prevention of foreclosure, and other needs.
If your home needs physical repairs (mandatory repairs) in order to qualify for a reverse mortgage,
a portion of the proceeds will be set aside for this purpose.
You can choose 3 options to receive the money from a reverse mortgage:
1) all at once (lump sum)
2) fixed monthly payments (for up to life)
3) a line of credit; or a combination of a line of credit and monthly payments. The most popular option, chosen by more than 60 percent of
borrowers, is the line of credit, which allows you to draw on the loan proceeds at any time.
At the death of the last borrower or the sale of the home, the loan is repaid from equity in the home.
Any remaining equity (which is often the case) goes to the heirs.
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