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What is a Reverse Mortgage?
A reverse mortgage is a loan that allows homeowners ages 62 and over to borrow against the equity in their home. The proceeds of the loan can be in a form of a lump sum payment, monthly payment, credit line or a combination of two of these options.
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Are Reverse Mortgages Too Good to be True?
No. Reverse mortgages are an excellent way for senior homeowners to access the equity that has been accumulated through years of ownership. Reverse mortgages can be an excellent way to diversify financial plans and allow the homeowner to stay in the house at the same time. Best of all, the loan proceeds are tax-free and can be used for anything – health care expenses, home improvement, a more comfortable retirement, you name it.
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How does a Reverse Mortgage Work?
A reverse mortgage operates in a reverse fashion of the standard mortgage that most homeowners know. When a reverse mortgage is signed, the homeowner take out a loan against the appraised value of your home and the lender pays you a lump sum, monthly payments, or provides a monthly credit line, all tax-free. Where traditional mortgages are considered “rising equity and falling debt,” reverse mortgages can be considered “falling equity and rising debt.” The debt in this case is the value of the home plus interest associated with the loan. However, the debt is not paid back until you have to move out of your house or you pass away. The homeowner can live in the house for the rest of his or her life and not have to be worried about making any type of mortgage payment; the homeowner actually gets paid to live in the house by utilizing the equity that has accumulated through the years by making mortgage payments. As long as the borrower takes care of the house, he or she can now have greater financial security.
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What Kind of House Can a Reverse Mortgage be Applied to?
Generally reverse mortgages are applied to primary residences. Vacation homes, mobile homes not attached to a foundation, rental properties, and homes on leased lands are not applicable to the loan program.
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What if the Home Currently Has a Mortgage?
The current mortgage on the home must be paid off with the proceeds of the reverse mortgage and the remaining balance of the loan can be distributed in a lump sum, monthly payment program, credit line or a combination of two of these options.
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Does the Homeowner Lose the Title to the Home?
No. One of the biggest misconceptions of reverse mortgages is that the borrower signs away his or her home when the loan is signed. If the homeowner decides to move out of the house, the loan balance and interest that has accumulated get paid back when the house is sold. The remaining balance is paid to the homeowner.
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Will a Reverse Mortgage Affect My Social Security or Medicare Benefits?
No. The proceeds of a reverse mortgage do not affect these benefits. Mortgage Financial recommends that you consult with your financial advisor regarding these benefits as well as Medicaid or SSI benefits.
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What Are the Kinds of Reverse Mortgages?
There are three main kinds of reverse mortgages: Fannie Mae HomeKeeper, Financial Freedom Line of Credit, and the FHA-HUD HECM. The Fannie Mae Home Equity Conversion Mortgage (HECM) is for seniors who want to stay in their homes. This is Fannie Mae's signature reverse mortgage product. It is an adjustable-rate mortgage (ARM) that lets you convert the equity in your home into a variety of flexible payment plans including monthly payments, a line of credit, a lump sum payment, or a combination of the three. The Financial Freedom Cash Account™ Plan gives seniors the flexibility and security of knowing they have money in reserve. The Cash Account™ is similar to home equity loans offered by banks, except there are no income qualifications and there is no required repayment until the loan matures. HUD's Home Equity Conversion Mortgage lets homeowners aged 62 or over, with little or no remaining balance on their mortgage, convert their home's equity into cash. The equity can be paid to the homeowner as a lump sum, a stream of payments, a series of draws from a line of credit, or a combination of monthly payments and a line of credit.
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Could the Borrower Ever Owe More than the Value of the Home?
No. Reverse mortgages are called “non-recourse” loans. Even if real estate prices fall, the borrower can never owe more than the balance of the loan.
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When Does the Loan Come Due?
The loan is called due when the borrower a) sells the house, b) moves permanently from the house or c) passes away. If there are two borrowers on the title, none of these actions occur until both borrowers have left the house.
These are just a start of the questions that you may have. We strongly recommend that you contact one of our loan officers for more information about reverse mortgage programs as well as your financial advisor or local council on aging.
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