Reverse Mortgage Loans
Older individuals who are retired and living on a fixed income sometimes have the option of taking out a reverse mortgage loan to pay for an unexpected medical bill, home repair, or to supplement their monthly incomes. A reverse mortgage can help an older individual enhance his or her lifestyle while remaining in the same home.
What Is a Reverse Mortgage Loan?
A reverse mortgage loan is a unique type of home equity loan, in which reverse mortgage lenders make payments to the borrowers, rather than the borrowers making payments to the lenders. Reverse mortgage loans are available to older borrowers who either own their homes outright or still have small mortgages and who are interested in tapping into their home equity to supplement their monthly income or cover another substantial expense. The Federal Housing Administration insures reverse mortgage loans as a part of the Home Equity Conversion Mortgage (HECM) program.
How Reverse Mortgage Loans Work
A reverse mortgage loan uses the equity a borrower has in his or her home to secure the loan. Proceeds from the loan are then distributed to the borrowers on a predetermined basis. Instead of the borrowers owing a monthly payment to the financial institution, they will receive payments. The loan will not be required to be paid back until the borrower dies, moves or sells the home. In the event of death, relocation or a home sale, the proceeds from the home sale will repay the mortgage or the borrower’s estate will cover the mortgage. In the event of death, heirs are provided with the option and a grace period to pay off a reverse mortgage loan, to keep the house in the family.
The amount for which a borrower qualifies to take out on a reverse mortgage depends on several factors including:
- Borrower’s age (or the age of the youngest spouse)
- Type of reverse mortgage
- Appraised home value
- Reverse mortgage rate
- Financial assessment of the borrower’s ability and willingness to maintain property taxes and homeowner’s insurance
Guidelines for a Reverse Mortgage
As a rule of thumb, the older the borrower and the more equity the borrower has in his or her home, the greater the amount he or she will be able to take out with a reverse mortgage loan. Borrowers should keep in mind that they will need to cover closing costs for a reverse mortgage up front at the time of the loan closing. Income from a reverse mortgage is not taxable and the interest accrued on the loan is not tax-deductible, as is the case with a regular mortgage.
Depending on the type of reverse mortgage selected, the principal balance of the loan will accrue interest either on a fixed reverse mortgage rate or based on adjustable reverse mortgage interest rates. Reverse mortgage loan interest rates are based on a standard rate (like the Wall Street Journal Prime) and then adjusted based on the individual loan terms, creditworthiness and potential risk determined by the financial institution.
Reverse Mortgage Loan Options
There are no regulations or restrictions contained in federal reverse mortgage guidelines regarding how a borrower uses the proceeds from a reverse mortgage loan, including paying off an existing mortgage, refinancing an existing reverse mortgage and purchasing a home. For this reason, borrowers are given several options for how the proceeds from a reverse mortgage will be distributed. These include:
- Lump Sum Distribution – Borrowers typically choose to take a lump sum distribution when the purpose of the reverse mortgage is to pay a large bill or to refinance an existing loan. A lump sum distribution is usually the only type of reverse mortgage loan on which reverse mortgage lenders offer fixed reverse mortgage interest rates.
- Fixed Monthly Distribution – With this type of proceeds distribution, the borrowers receive a predetermined monthly payment from their financial institution. A loan with this type of distribution, which is taken over time, typically features an adjustable or variable reverse mortgage rate.
- Line of Credit – Proceeds from reverse mortgage loans can also be accessed as a line of credit, which is only used and distributed as funds are needed by the borrower.
- Combination of Distribution Types – Borrowers also have the option of choosing to distribute equity in a combination of manners. For example, a borrower might take a portion in a lump sum at closing and establish fixed monthly payments for the remaining portion. Although these combined loan distribution mortgages include a lump sum payment, they are typically priced with adjustable reverse mortgage interest rates, like the line of credit and monthly distribution options.
Basic Reverse Mortgage Guidelines and Requirements
Federal regulations have established a set of reverse mortgage guidelines and requirements for both borrowers and reverse mortgage lenders.
- Age – Borrowers must be at least 62 years old.
- Primary Residence – Borrowers must live in the home on which the reverse mortgage is taken.
- Financial Resources – Borrowers must have enough verifiable financial resources to pay property taxes, insurance, homeowner association fees and any other expenses associated with the property.
- Counseling – Prior to taking out a reverse mortgage all borrowers and non-signing spouses are required to obtain counseling from an independent third party qualified to provide reverse mortgage information. Counseling usually occurs with a government-approved housing counseling agency.
Think a Reverse Mortgage Might Be Right for You? Access Reverse Mortgage Loan Information
Although reverse mortgage loans are not the right solution for every person looking to supplement their income in retirement, reverse mortgage loans can be a great option for tapping into and benefiting from the home equity homeowners work to build throughout their lives. To learn more about reverse mortgage loans or learn how to apply online, we encourage you to contact one of our mortgage lenders today.
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