A reverse mortgage is a type of home equity loan, insured by the Federal Housing Administration (FHA) under the U.S. Department of Housing and Urban Development, for homeowner's 62 and up. Under a reverse mortgage, borrowers are freed from making monthly mortgage payments and can stay in their home. The loan balance only become due when the borrower moves, sells, dies or falls behind on paying maintenance costs, property taxes or homeowners insurance. Also known as a home equity conversion mortgage, or HECM, HECM reverse mortgages are regulated by the government and subject to specific guidelines designed to protect the borrower, such as counseling, financial assessment and more. The HECM reverse mortgage is the most common type of reverse mortgage, and it is issued by private banks and insured by FHA.
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A reverse mortgage converts home equity into a flexible source of funds borrowers can use any way they choose. From health care expenses, travel, home modifications and home improvements, homeowners have the funds on hand to pay for any expenses that arise. The reverse mortgage program also gives a qualified borrower the option to age at home. Since the homeowner retains title to the home and may now have the funds to remain there, aging in place may become a reality. As a government non-recourse loan, a reverse mortgage will not require repayment of more than the fair-market value of the home as determined by a licensed FHA-certified appraiser. This feature protects the homeowner and the estate.
How Does It Work?
The lender makes payments to you based on a percentage of value in your home. You can choose a single lump sum, a regular monthly cash advance, a line or credit, or a combination of these options.
When is it repaid?
The loan becomes due when the borrower no longer lives in the home or fails to abide by the loan terms, including keeping up with home maintenance and paying the taxes and insurance. No longer living in the home would include: selling the home, permanently moving out, or passing away.
Who is eligible?
Homeowners age 62 and older who own their home outright or have small mortgage balances.
How can the money be used?
For any reasons: healthcare costs, home improvements, supplemental income or to pay off debt.
Some of the important benefits to consider when choosing a reverse mortgage include:
You can never owe more than your home is worth.
You will not lose your Social Security or Medicare benefits
As long as you live in the home and are current on your taxes and insurance and manage your improvement repairs, you will not have to make a mortgage payment.
You will create an additional source of funds to use in any way you choose
Title to the home remains in the borrower's name as long as you comply with loan the terms (taxes and insurance, and maintenance.)
Unused portions in your line of credit can increase in value over time. A reverse mortgage line of credit grows at the same rate at which the loan accrues interest.
Reverse mortgages are non-recourse loans, meaning the proceeds from the sale of the home are the only asset that can be taken to pay the loan's balance. If the loan's balance surpasses the value, as determined by an FHA-approved appraiser, the difference is covered by the FHA insurance funds.
After completing the required reverse mortgage counseling, a qualified loan originator will verify your eligibility and complete a preliminary financial assessment to make sure you have the financial capability to continue the responsibilities of maintaining your home. Once this is finished, preliminary paperwork will be completed so the file can be processed. This will be the opportunity for costs or fees associated with the reverse mortgage to be discussed. An appraisal of the home will also be required to determine its value. The appraisal and paperwork will be sent to a loan underwriter for approval in which the file will be checked to make sure it complies with all rules and guidelines.
Your reverse mortgage proceeds can be received in any combination of the following four options:
- Line of credit - Borrowers can choose a line of credit that offers flexible and easy access to draw funds as needed.
- Lump sum - Borrowers who choose the fixed-rate option can take their funds in a lump sum at closing. This option provides larger funds up-front.
- Tenure - Monthly payments received for the life of the loan.
- Term - Borrowers can receive monthly payments for a predetermined amount of time. This option can be combined with a line of credit.