While the most recent economic downturn has most homeowners wondering where the market will decide to turn regarding their overall sense of financial security, the previous four decades have nonetheless shown a strong and stable rise in the value of the country’s housing portfolio. In broad terms, a significant portion of the population have resided in their current homes for quite a while, and have subsequently reaped a good amount of equity build-up as a result. As the overall age of this demographic sector advances, specifically those who are in or approaching retirement age, many find themselves with not as much savings to fall back on as once hoped. Combine this with having access to only moderate means or sources of available income, this equity represents a large share of their accumulated net worth.
Many consumers are exploring the numerous options in the lending market to access this yet untapped asset. The more conventional methods are home equity lines or refinancing their existing mortgages, to name a few. However, should monthly payment obligations or low income resources be a factor, these options could be difficult for an older borrower to qualify for. For those in the population pool that are moving toward the golden years of life, and would like to seek out another very popular concept making its way into the realm of financial possibilities, the answer might be a reverse mortgage.
What is a Reverse Mortgage?
In this broad summary, the loan option referred to as a reverse mortgage takes it’s definition and characteristics from its very name – in simple terms, it is the exact reverse process of a standard mortgage loan. It is a lending mechanism that permits a homeowner from the age of 62 years or older to tap into the equity of their home. It becomes the means to provide the homeowner with access to either a large ‘lump sum’ source of cash, or, a way to create a comfortable source of tax-free monthly income.
With a standard type of mortgage program, the typical borrower is obligated to maintain a monthly repayment schedule back to their lending source in order to repay the funds that were originally provided by the lender to either buy or refinance the home. Naturally, these repayment amounts include the interest applied to the loan in the approval and closing process. The loan procedure making up the reverse mortgage process is just the reverse. In this case, the lender provides the monthly payments to the homeowner. In addition, the home is used as security or collateral for the loan amount by the lender in a reversed mortgage, just as it would be in a standard type of mortgage.
Reverse Mortgage Funding Options
There are certainly some key aspects in the reverse mortgage program that determine exactly what amount and what type of funding is available from a loan of this kind. Primary factors such as the value of the existing home are most important. The higher the market value, the higher the loan amount. Another factor is the borrower’s current age, along with a co-borrower’s age if applicable, and generally, the older a borrower is, the more funds will be available. The mortgage interest rates will be a factor as well, and will play the usual role in the funding decision as they do in a standard mortgage – the lower the rates, the more loan a borrower has access to. Geographical area also plays a role in the lending equation, and state and federal guidelines will determine if there are specific lending limits required.
There are three types of reverse mortgage funding guidelines a homeowner can decide upon based on their specific income needs. As mentioned, the first is the lump sum arrangement to allow the most access to the most cash all at once. The next option is the setting up of a monthly payment income stream. This option has two variables. One is to schedule the payments for a fixed time period, called a term type, or, until such time that the borrower (or borrowers) no longer resides in the home, called a tenure type. The third option is when borrowers can choose to set up a line of credit to draw from, accessing the funds as they need them. Almost two thirds of the borrowers who utilize the reverse mortgage concept choose the most popular line of credit option.
The Fine Print on a Reverse Mortgage
Based on the loan proceeds, there are indeed interest charges that will be accumulating on the funds that are withdrawn. However, there will be no monthly payments to be made on the loan. Also, the balance on the loan must be paid off at such times as the borrower either moves or sells the residence, or passes away, or if the ownership of the residence transfers to another individual. In addition, should the sale price of the home exceed the mortgage balance, the difference stays in the hands of the owner or is transferred to the heirs of the estate.
An additional stipulation is that at such time as the present mortgage is completely paid, this being a mandatory requirement, the funding issued with the reverse mortgage can be utilized for any purpose the borrow may need, whether for home improvements, medical expenses, or other debt consolidation. Reverse mortgages are an option for generally all types of property, though there are state-sanctioned guidelines with respect to co-ops. These reverse mortgage programs are federally insured private loans, and are provided through the U.S. Department of Housing and Urban Development (HUD), and handled through the auspices of the Federal Housing Agency (FHA).
The guidelines require that every potential borrower must receive assistance or counseling from a HUD approved agency before proceeding with the loan application. The counseling is necessary to ensure the terms and risk factors of the program are completely clear. Counselors are mandated to review all of the implications of the reverse mortgage program and each of its potential options. For every home-owning member of the senior demographic considering the advantages of living the stress-free retirement way of life, then the reverse mortgage can be a very rewarding and financially sound means to achieving that goal.