Reverse Mortgage 0
A Reverse Mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home without having to sell their home, give up title, or take on a new monthly mortgage payment. The loan proceeds can be used for any purpose, or taken out as a lump sum payment, fixed monthly payment, line of credit, or a combination.
A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care).
In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g., 30 years) the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.
The loan amount depends on the borrower’s age, current interest rates, and the value and location of the home. A reverse mortgage isn’t repaid until the borrower moves out of the home permanently or dies. The house is then sold to repay the loan. The repayment amount can’t exceed the value of the home. On the other hand, any equity that remains after the loan is repaidis distributed to the borrower or his or her heirs/estate. A senior’s home doesn’t have to be owned free and clear to qualify for a reverse mortgage.
The amount of money available to the consumer is determined by five primary factors:
- The appraised value of the property, whether any health or safety repairs need to be made to the house, and whether there are any existing liens on the house.
- The interest rate, as determined by the U.S. Treasury 1 year T-Bill, the LIBOR index or 1 Year CMT.
- The age of the senior (The older the senior is, the more money he/she will receive).
- Whether the payment is taken as line of credit, lump sum, or monthly payments. Line of credit will maximize the money available, while lump sum provides the cash immediately, but the interest fees are the highest. Monthly payments are set up as a “Tenure” payment. Borrowers receive them for the rest of their lives no matter how long they live.
- The value of the property, and whether that value is higher than the national loan limit set by Department of Housing and Urban Development (HUD).
A reverse mortgage loan can be issued only on one’s primary residence. As a preliminary matter, it is worth noting that these loans have relatively high fees, and federal law requires the borrower to undergo “loan counseling” (in person or over the phone) to ensure that he or she understands the concept completely. Reverse mortgage loans can be considered by any senior in need of funds. Because of their high fees, however, reverse mortgage loans may not always be the most effective choice if other options are available.
Reverse mortgages have been criticized for three major shortcomings:
- Being expensive. Reverse mortgages can cost $15,000 or more to enter into, as compared with other types of loans which often cost less than $10,000.
- Being confusing to those entering into them. Many seniors entering into reverse mortgages don’t fully understand the terms and conditions associated with the loans, and it has been suggested that some lenders have sought to take advantage of this. But in a 2006 survey of borrowers by AARP, 93 percent said their reverse mortgage had had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative. Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with the counselors that they were required to see.
- Compound Interest. Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. Because of this compound interest, the longer a senior has a reverse mortgage, the more likely it is that all of the home equity will be depleted when the loan becomes due. That said, with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs.
Reverse mortgages are not available from all banks and mortgage lenders. For a list of lenders in your area, and for further information, see www.reversemortgage.org.
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