What is a Reverse Mortgage?

Unlike an ordinary mortgage, which involves payments by the borrower to the lender, a reverse mortgage involves payments by the lender to the borrower. It is an arrangement whereby homeowners get cash (usually in the form of monthly payments or a lump sum) in return for a mortgage on their home, which is used as security against the loan. This is a strategy sometimes used by retired homeowners who need to supplement their income. A reverse mortgage is one way of tapping into the value of a home.

What's a reverse mortgage?

A loan against your home that requires no repayment
for as long as you live there.

How's it different?

To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. So your income generally has nothing to do with getting the loan or the amount of the loan. With most home loans, if you fail to make your monthly repayments, you could lose your home. But with a reverse mortgage, you don't have any monthly repayments to make. So you can't lose your home by failing to make them.

Who can get one?

You must own your home, and generally all of the owners must be at least 62 years old.
Your home generally must be your "principal residence" - which means you must live in it more than half the year. For the federally-insured "Home Equity Conversion Mortgage" (HECM), your home must be a single-family property, a 2-4 unit building, or a federally-approved
condominium or planned unit development (PUD). During 2001, cooperatives are also expected to made an eligible property for a HECM. Most mobile homes are not eligible, although some "manufactured" homes may qualify if they are built on a permanent foundation, classed and taxed as real estate, and meet other requirements. If you have any debt against your home, you must either pay it off before getting a reverse mortgage or - this is what most borrowers do - use an immediate cash advance from the reverse mortgage to pay it off. If you don't pay off
the debt beforehand, or do not qualify for a large enough immediate cash advance to do so, you cannot get a reverse mortgage.

How much cash can you get?

The amount of cash you can get from a reverse mortgage depends on the program you select and - within each program - on your age, home, and interest rates.

It can vary by a lot from one program to another. A typical consumer might get $30,000 more from one program than from another. But no single program works best for everyone. For all but the most expensive homes, the federally- insured "Home Equity Conversion Mortgage" (HECM) generally provide the most cash. Within each program, the amount of cash you can get depends on the age(s) of the owner(s), the value (and in some cases the location) of the home, and
current interest rates. In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. On the other hand, the least cash generally goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high. But remember, the total amount of cash you actually end up getting from a reverse mortgage will depend on how it's paid to you plus other factors.

How's it paid to you?
That's up to you. You could take it as an immediate cash advance at closing, that is, a lump sum of cash paid to you on the first day of the loan a creditline account that lets you take cash advances whenever you choose during the life of the loan - until you use it all up OR as a monthly cash advance for a specific number of years that you select, OR for as long as you live in your home, OR - if you use the loan to buy an annuity - for the rest of your life, no matter where you live OR as any combination of immediate cash advance, creditline account, and monthly cash advance Use the calculator at www.aarp.org/revmort/ to estimate how much cash you could get from a reverse mortgage.

There are two types of reverse mortgage. They are;

1. Home equity conversion mortgage.
2. Fannie Mae home keeper mortgage.

Advantages of Reverse Mortgage:

a. Help you maintain your financial independence and inadequate standard of living.
b. Allows you to remain in your home and retain ownership.
c. The money, you receive from it is tax-free.
d. This product is usually attractive to older homeowners, who have accumulated substantial equity in their homes.
e. Unlike an ordinary mortgage, which involves payments by the borrower to the lender, a reverse mortgage involves payments by the lender to the borrower.

Disadvantages of Reverse Mortgage:

a. Their options can be numerous and confusing.
b. Are more costly to set up than other types of loans.
c. only those who are in their 70s and 80s can derive benefits of this type of mortgage financing.
d. It is more expensive than traditional loans. The cost of obtaining reverse mortgage can be very high.

 

 

 

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