Learning About Reverse Mortgage Options

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The term reverse mortgage is everywhere these days. It often appears in advertisements or appears on Internet searches. But you would not have understood what it is actually.

In short, it is a unique home loan that allows home owners to convert some of their home equity into cash. The equity that the homeowner has earned over the years of making payments on their home can now be paid back in installments. In a typical mortgage situation, the borrower makes payments to the lender and each payment reduces the balance owed and builds up the borrower’s equity in the home. In a reverse mortgage, the borrower receives payments from the lender, and each payment increases the loan balance and decreases the amount of equity.

Who originates these loans?

Most of these loans are originated by the Federal Housing Administration (FHA) and are known as home equity conversion mortgages, or HECMs. An HECM is guaranteed by the FHA, so the borrower does not need to be concerned about failing to receive payments from their lender.

Who is eligible for these loans?

To qualify for this type of loan, homeowners must be 62 years or older and have significant equity in their home. Also, in order to receive an HECM, homeowners must own their homes outright or have the outstanding balance on their home small enough that it can be repaid with the proceeds from the reverse loan at foreclosure. In addition, the borrower must live in the home and be able to pay the recurring charges associated with the property, including taxes and insurance. Lastly, borrowers should seek information from an HECM counselor before obtaining a loan. The applicant’s home must be a single-family home, a HUD-approved condominium or manufactured home that meets FHA requirements, or a two- to four-unit home if the borrower lives in one of the units.

How much can you borrow?

The amount a homeowner can borrow with a reverse mortgage varies based on their age, the value of the home, and the loan’s interest rate. In most cases, older homeowners are able to borrow more money, and the more the home is worth or the more equity the owner has in it, the more the owner is able to borrow. Lower loan interest rates also increase the borrowing power of the homeowner.

How do I get my funds?

With HECM, borrowers have several options for receiving their payments. Borrowers can choose to receive a lump sum payment at loan closing or the borrower can take out a line of credit. This line of credit can be used as the borrower chooses and grows over time. A borrower can also choose to receive the payments in the form of a monthly annuity. A tenure monthly annuity is a monthly payment that the borrower receives for the entire time the borrower lives in the home. A monthly annuity is a monthly payment that the borrower receives for a set period of time chosen by them. Borrowers can also choose to combine these options, such as by opting to receive a monthly annuity but also take some cash at the end. Borrowers can also switch from one option to another by paying a small fee.

A reverse mortgage can be a beneficial source of income for senior citizens. By researching the pros and cons of this type of loan, homeowners can determine whether it is a good fit for their financial situation.

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