Reverse Mortgage Loans
What are Reverse Mortgage Loans?
A reverse home mortgage loan also referred to as a Home Equity Conversion Mortgage (HECM), is a financial tool for homeowners of age 62 years to convert the equity in their into cash through different options available. This loan is FHA approved for seniors only.
How Reverse Mortgage Loans Work
The lender that grants a reverse mortgage loan has a paramount lien on the property. However, the borrower does not make payments on the loan as in a traditional mortgage and is not legally responsible for any deficiency in value when the loan becomes due at the death or permanent relocation from the home. The borrower receives payment from the lender. The amount that the borrower will receive will be based on the value of the equity in the home, the borrower's age, and interest rate. The home, being the collateral for the loan, will be received by the lender when the borrower passes away or move out of the home. However, the homeowner of heirs can keep the home by paying off the loan at any time.
The reverse mortgage loan proceeds to the homeowner are not taxable and does not have any effect on Medicare benefits or Social Security. It serves as a financial tool for seniors who are cash-strapped.
There are basic qualifying requirements that potential borrowers must satisfy to obtain a reverse mortgage loan.
- Applicants must be 62 years old or older.
- The home (used as collateral) must be the principal residence of the applicant.
- The house must be a single-family of a condominium approved by the FHA.
- The potential borrower must complete a mandatory counseling session approved by the HUD to ensure that the applicant understands the financial implications and requirements of the reverse mortgage loan.
- The applicant must have the financial capability and willingness to pay mandatory obligations such as property taxes, insurance, and maintenance.
The Rate and Costs on Reverse Mortgage Loans
The rate of interest on the mortgage loan, irrespective of being reverse or conventional, can either be fixed or variable rate and is dependent on the current market interest rates and the lending company could decide to make its rate competitive. Therefore, interest rates differ from lender to lender. Besides, an upfront mortgage insurance premium (MIP) is charged along with traditional closing fees. The fee is 0.5% if the LTV (loan-to-value) ratio is 60% or less. But the fee is 2.5% if the LTV is more than 60%. However, an extra 1.5% MIP is charged annually. This serves as a protection for the lender if the value of the home reduces during the term of the loan.
When the Reverse Mortgage Becomes Due and Payable
- When the borrower or the last of the borrowers dies
- When the borrower does not stay in the home for at least 12 months
- When the borrower ceases to make the home the primary residence
- When the borrower sells the property
- When the borrower fails to keep the requirements of the loan
Find out more about Reverse Mortgage Loans.