There have been some changes to reverse mortgages in recent years. It may be worthwhile to find out if this might be a useful financial tool for you or your family.
The simplest definition of a Reverse Mortgage is a special type of mortgage that allows a senior homeowner to tap the equity of their home and eliminates the monthly mortgage payment. As long as the borrower lives in the home, they cannot default on the loan or be forced to move, as long as they maintain the home and pay property taxes and provide the required homeowner’s insurance. When the borrower no longer lives in the home, for whatever reason, the loan is repaid.
The Daily World, in “Reverse mortgages—your questions answered,” explains that in order to qualify, the homeowner must be 62 years of age or older and pass a credit check. The home also has to be used as the primary residence.
With a reverse mortgage, the homeowner retains the title and ownership during the life of the loan and can opt to sell the home at any point. The home can have an existing mortgage. Many borrowers apply the reverse mortgage funds to pay off any existing mortgage and eliminate the monthly mortgage payments.
The amount of money one can receive from a reverse mortgage is determined by the following: (i) the age of the youngest spouse; (ii) the value of the home; and (iii) the current interest rate.
The money from a reverse mortgage can be received in a lump sum, in monthly payments, or through a line of credit. It can also be any combination of these options.
Reverse mortgages are insured by the Federal Housing Authority and the Department of Housing and Urban Development (FHA/HUD). If something happens to the lender, HUD takes over the loan and become the reverse mortgage servicer.
There is one important thing to keep in mind. Because there are no monthly payments, the interest on the reverse mortgage loan increases over time. That means the balance due is going to be higher than when the loan originated. It is entirely possible that when you sell or move, you will have little or no equity in the home. The good news: today the borrower and/or their heirs are protected by law and they will never owe more than 95% of the market value of the home, when the loan becomes due.
Reference: The Daily World (November 18, 2016) “Reverse mortgages—your questions answered”