A reverse mortgage enables you to borrow money against the value of your home. The mortgagor (lender) does not expect any principal and interest repayments until you either sell the home or die—whichever comes first. Lenders always require that you don’t have any other loans before they can grant you a reverse mortgage. A prime requirement is that if there is any lien on your home, then it must be repaid off with the proceeds from the reverse mortgage. The number of people opting to take reverse mortgages is on the rise because of the extra cash that one retains at the end of the deal. Could this be an option for you?
Benefits Of A Reverse Mortgage
- There are no monthly repayments. Payments are made only when you refinance, sell your home or die—whichever comes first. This enables you to enjoy doing other things instead of committing to monthly repayments.
- There are no prepayment penalties. HECM, FHA-insured secured mortgages can be fully or partially paid any time at no additional fees or costs.
- Tax benefits. The income obtained from a reverse mortgage deal is tax free. The homeowner can therefore use the money obtained to fulfill other financial obligations.
- Simple qualification requirements. Unlike other types of mortgages which require the borrower’s employment details and credit rating, only the borrower’s age, value of the home and the current interest rates are required.
- Asset protection guarantee. The amount payable at the end of the period of the term for the reverse mortgage is the sum of accrued interest plus the actual fees received. The amount repaid will therefore never exceed the value of the home; so long as you sell the property to repay this reverse mortgage.
Important Things To Know About A Reverse Mortgage
- Qualifications. For you to qualify for the FHA HECM reverse mortgage, you must be a homeowner aged 62 years or more. You must rightfully own your current home or have a very low mortgage balance that can be cleared by proceeds arising from the reverse mortgage. You must legally reside in that home. FHA requires that you subscribe to a HECM counselor to receive relevant consumer information at a very low cost or free of charge just before obtaining the loan.
- The title to the home. Unlike other types of mortgages where the title is retained by the lender until full payment is made, the owner retains the title. However, payment for the home must be made at the end of the mortgage term.
- Property taxes and insurance. The borrower continues to pay homeowner’s insurance and property taxes. As a homeowner, you are expected to reside in that home as their primary residence and maintain it in good condition—which allows the homeowner to keep the loan according to their wishes.
- It is non-recourse. Neither the homeowner nor their heirs will be responsible for a part or any part of the loan which can’t be repaid from equity resulting from the home. The liability of the reverse mortgage borrower is therefore limited to the value of the home.
- Modes of receiving payments. There are five modes of payment that you can select as a homeowner:
- Line of Credit- unscheduled installments without a regular pattern which you select as you wish.
- Term- equal monthly payments that last for a fixed period of months agreed upon.
- Modified Term- combination of both the term and the line of credit according to the homeowner’s wishes until exhaustion of the whole amount.
- Tenure- equal monthly payments proceeding to the borrower as long as they retain the house as their primary residence.
- Modified Tenure- this is a combination of both the term and the line of credit as long as the homeowner still resides in the home.
- Inheritance of the estate. In case the home is resold or not used as the borrower’s primary residence, any interest, cash or other charges arising from the HECM must be repaid in good time. If there are any proceeds beyond these amounts they revert to your spouse, or estate; the remaining equity is transferable to your heirs.
- Eligible types of homes. FHA requires that your home must be either a single family house or a 2-4 unit house with one of them being occupied by the owner in person. Other HUD approved manufactured homes and condominiums which meet the stipulated FHA requirements are also eligible for a reverse mortgage.
- Comparison with a home equity loan. A home equity loan or second mortgage requires that applicants have adequate income not only to qualify for the loan, but also to demonstrate capacity to make monthly payments on the interest and the principal amount. On the other hand, a reverse mortgage is different because it pays you rather than having you pay. However, you need to pay utilities, insurance premiums against floods and other hazards as well as real estate taxes.
- Right of rescission. What if you change your mind after taking a reverse mortgage? Well, the HECM allow you to cancel your loan after three days if you decide otherwise. This is referred to as the three-day right of rescission. Inquire from the mortgagor about their requirements because different lenders have varying rules on the same.
- The amount you can receive from a reverse mortgage- the amount entitled to a homeowner from a reverse mortgage transaction depends on the age of the borrower, the prevailing interest rate, the initial mortgage insurance premium (HECM SAVER or HECM Standard) and the lesser of the appraised value of the home, the sales price or FHA limit (currently $625,000). You receive a higher amount if you are older and the interest rate is lower.
A reverse mortgage enables the homeowner to create more money for alternative uses, especially at the age of 62 when productive capacity is very low. However, you should conduct thorough research on the overall loan costs before making a decision.