A reverse mortgage is one of the ways that seniors of 62 years of age and above can convert the equity in their home to cash. It is an alternative source of income for people in their retirement. The primary advantage of a reverse mortgage is that it does not regard the borrower’s credit; in fact, it is often not checked because the borrower is not required to make any payments. Rather, it is the lender that makes payments to the borrower according to the payment option agreed on.
However, it is essential to understand completely a reverse mortgage, its implications, and alternatives.
Definition of a Reverse Mortgage
A reverse mortgage is a type of mortgage that allows a homeowner to borrow money against the estimated value of his or her home, otherwise referred to as home equity. The mortgage, including the principal and interest, is not expected to be repaid until the death of the borrower or the house is sold. The home is the collateral for the loan, and it will be sold to pay back the mortgage when the borrower passes on. However, the mortgage allows for the heirs to repay the mortgage without selling the home if they so choose.
Meticulous calculations are carried out to ensure the fairness of the mortgage. The initial mortgage amount, interest rates, the duration of the loan, and the rate of price appreciation of the home are accounted for in order to structure the mortgage to prevent the loan amount from exceeding the value of the home over the length or duration of the loan.
Most of the time, the lender will insist that there should be no other liens (legal claims) against the home; and that any standing liens must be settled with the proceeds of the reverse mortgage.
The traditional mortgage requires that a monthly sum (principal and interest) is paid with the effect that the amount owed reduces and the value of the home increases. On the other hand, a reverse mortgage works in a direct contrary to the traditional mortgage. The reverse mortgage allows the borrower to convert the value of the home into cash. The borrower does not make any monthly payments. However, the borrower can receive the loan as a lump sum, a regular monthly payment, or as a credit line allowing the borrower to draw on it as needed.
A reverse mortgage ensures that the borrower continues to own the house and receive cash anyway he or she chooses. As the borrower receives cash, the loan amount increases and the equity in the home reduces.
The Kind of Home That Qualifies for Reverse Mortgage
Not all homes can be used to secure a reverse mortgage loan, but the following:
- A single family home, a two-to-four-unit home (but the applicant must occupy one of the units)
- A condominium that is approved by the HUD
- A manufactured home built after June 1976, but must meet the FHA requirements.
Meanwhile, the property must be owned outright or have a small mortgage that can be offset by the proceeds from the reverse mortgage loan.
Find out more about Reverse Mortgages.