Reverse Mortgages
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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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