Reverse Mortgages are specialized home loans for homeowners that are 62 years or older and can be very useful to those who want to tap into their home's equity to enhance their cash flow.
What is a Reverse Mortgage?
Also known as home equity conversion mortgages (HECM), reverse mortgage loans allow homeowners age 62 and over to access a portion of their home's equity which they have built up over the years. Payment of the loan is deferred until the homeowner sells their home, access a portion of their home's equity, moves out of their home, dies, or otherwise fails to comply with the loan terms. There are no required monthly mortgage payments on a reverse mortgage loan, meaning that the interest of the loan is added to the loan's principal balance every month. However borrowers are required to continue paying property taxes, property insurance, and maintain the home according to FHA guidelines
For example, let's say an elderly couple has a conventional 30 year mortgage, they borrowed $300,000 and have a remaining balance of $50,000 left. This means that their equity is $250,000. If the couple decides to use a reverse mortgage loan they then tap into their home's equity and are able to draw out money as a means of increasing their cash flow rather than let it stay as equity. This can be particularly useful for older homeowners who want to pull equity out of their home safely for private projects or to simply maintain their current lifestyle without adding to their monthly expenses.
Of course reverse mortgages are a little more complex than the example above, however the core concept is maintained: older borrowers are able to draw money from their home's equity, deferring any remaining payment on their mortgage, so long as they comply with the loan terms, until they no longer live there, at which point the remaining balance will then be due shortly after.
To be eligible for a reverse mortgage, the FHA requires all borrowers on title be 62 years or older. Borrowers must also meet financial eligibility criteria as laid out by HUD (Housing and Urban Development). Most single -family homes, two-to-four unit owner-occupied dwellings, townhouses, and approved condominiums are eligible for a reverse mortgage. This is contingent on the property meeting FHA minimum property standards.
Reverse mortgage loans give homeowners the ability to use their equity as a cash source. This is especially useful for homeowners who do not have a steady paycheck to support them. A reverse mortgage loan can then be seen as a way for seniors to maintain their lifestyle without sacrificing time or other treasured assets. Homeowners can receive their loan in a variety of ways:
Tenure:equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term:equal monthly payments for a fixed period of months selected.
Line of Credit: unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
Modified Tenure: combination of line of credit and scheduled monthly payments for as long as you remain in the home.
Modified Term: combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
Single Disbursement Lump Sum: a single lump sum disbursement at mortgage closing.
Before you do a reverse mortgage it's best to have an idea of how much money you would like to draw out of your home so as to avoid drawing out too much or too little equity.
Although the advantages are straightforward, there are very real risks tied to reverse mortgages. Reverse mortgages come with larger closing costs, up to 5% of your home's value in some cases. The loan also gets larger over time, increasing what it would cost for potential inheritors to pay for the home. Lastly, reverse mortgages are not well understood by many individuals increasing the likelihood that borrowers may not utilize their loan the best way. Borrowers must be aware of the risk of foreclosure if they do not comply with the loan terms.
Reverse mortgages are a good option for borrowers who qualify and would like access to their home's equity to fund personal projects or maintain their current style of living. Despite the risks listed above, a reverse mortgage cannot go "upside down, so the heirs will never be personally liable for more than the home is sold for. However the best way to know if a reverse mortgage is right for you is to speak with a loan professional at Equity Smart. Give us a call, we would be more than happy to help!
[These materials are not from HUD or FHA and were not approved by HUD or a government agency.]
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