A Beginner’s Guide to Reverse Mortgages
For residents considering a reverse mortgage, there may be a lot of questions. Below is a basic guide to how reverse mortgages work and how they can provide you with much-needed cash.
A reverse mortgage allows a homeowner who is 62 or older to leverage the equity in their home without having to move. Repayment of the loan is not required unless the homeowners no longer live at the property, the last surviving borrower dies, or there is noncompliance on the loan terms, such as payment of insurance and property taxes. Introduced in 1961, they are also referred to as a home equity conversion mortgage or HECM. The loans are federally insured and regulated by the U.S. Department of Housing and Urban Development (HUD).
With these loans, the bank pays the borrower during his or her lifetime. The amounts are based on the accumulated equity in the home. You will never owe more than the value of your home independent of how much money you choose to borrow. If the loan balance is less than your home’s value when it comes time to be repaid, you (or your heirs) keep any balance.
Amounts and eligibility
The amount you can borrow with a reverse mortgage varies and is based on several factors. They include your home’s assessed value, available interest rates, the age of the borrower (or the youngest age of co-borrowers), and the lesser of the appraised value, or the federal limit of $625,500, or the sales price. The home must be your primary residence. In general, the more valuable your home, and the older you are, means you’re eligible for more money. Borrowers must not have any outstanding property liens and must attend a session with a HUD-approved counselor.
Borrowers receive their funds in different ways. With an adjustable-rate mortgage, funds can be received as a fixed monthly payment, line of credit, lump sum, or a combination of these methods. With a fixed-rate mortgage, the payment is a lump sum.
Eligible houses and existing mortgages
Single-family homes, townhouses, detached homes, and multi-unit properties (up to four units) that are owner-occupied are eligible. Certain guidelines apply for condos and manufactured homes. Your house does not need to be paid off to qualify for a mortgage but there should be a small mortgage on the property. However, you must use the reverse mortgage proceeds to pay off any existing mortgages or liens.
Impact on heirs
Many borrowers wonder about the impact of a reverse mortgage on their heirs. When the loan is required to be repaid, either the borrower or the estate must pay back the principal, plus interest and fees. Remaining equity in the home goes to you or the estate.
Reverse mortgages are an incredible opportunity for seniors who need to disposable income to provide financial flexibility in their golden years. Having solid information about a reverse mortgage, eligibility, requirements, and payment terms will help you make an informed decision for you and your family.
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