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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. |
