A reverse mortgage is a
special type of loan used by older Americans
to convert the equity in their homes into
cash. The money from a reverse mortgage can
provide seniors with the financial security
they need to fully enjoy their retirement
years.
The reverse mortgage is aptly named because
the payment stream is "reversed."
Instead of making monthly payments to a lender,
as with a regular first mortgage or home equity
loan, a lender makes payments to the borrower.
While a reverse mortgage loan is outstanding,
the borrower continues to own the home and
hold title to it.
The money from a reverse mortgage can be used
for ANYTHING: daily living expenses; home
repairs and home modifications; medical bills
and prescription drugs; pay-off of existing
debts; continuing education; travel; long-term
health care; prevention of foreclosure; and
other needs.
If the borrower home needs physical repairs
(mandatory repairs) in order to qualify for
a reverse mortgage, a portion of the proceeds
will be set aside for this purpose.
To qualify for a reverse mortgage the borrower
must be at least 62 and own the borrower’s
own home. There are no income or medical requirements
to qualify. The borrower may be eligible for
a reverse mortgage even if the borrower still
owes money on a first or second mortgage.
In fact, many seniors get a reverse mortgage
to pay off a first mortgage.
The borrower can choose how to receive the
money from a reverse mortgage. The options
are: all at once (lump sum); fixed monthly
payments (for up to life); a line of credit;
or a combination of these. The most popular
option - chosen by more than 60 percent of
borrowers - is the line of credit, which allows
the borrower to draw on the loan proceeds
at any time.
The size of the reverse mortgage that the
borrower can get depends on the borrower’s
age at the time the borrower apply for the
loan, the type of reverse mortgage the borrower
choose, the value of the borrower’s
home, current interest rates, and - sometimes
- where the borrower live. In general, the
older the borrower is and the more valuable
the borrower’s home (and the less the
borrower owe on the home), the larger the
reverse mortgage can be.
The costs associated with getting a reverse
mortgage include the origination fee (which
can be financed as part of the mortgage),
an appraisal fee, and other charges similar
to those for regular mortgages.
The money provided to the borrower from a
reverse mortgage is tax-free, and does not
affect regular Social Security or Medicare
benefits. However, the funds received from
a reverse mortgage may affect the borrower’s
eligibility for certain kinds of government
assistance, such as Medicaid or state assistance
programs, so the borrower should check into
this before getting a reverse mortgage.
Before applying for a reverse mortgage, the
borrower must first meet with a reverse mortgage
counselor. The borrower may, however, first
approach a reverse mortgage lender, who can
provide the borrower with the names of approved
counseling agencies in the borrower’s
area.
The counselor's job is to educate the borrower
about reverse mortgages, to inform the borrower
of other alternative options available to
the borrower given the borrower’s situation,
and to assist the borrower in determining
which particular reverse mortgage product
best fits the borrower’s needs.
In general, counseling sessions are done face-to-face,
although telephone counseling is becoming
more prevalent.
No payments are due on a reverse mortgage
while it is outstanding. The loan becomes
due and payable when the borrower ceases to
occupy the home as a principal residence.
This can occur if the borrower (the last remaining
spouse, in cases of couples) pass away, sell
the home, or permanently move out.
The home does not have to be sold to pay off
the loan. The borrower (or the borrower’s
heirs) can pay off the reverse mortgage and
keep the home. In any event, the amount owed
on the reverse mortgage can never exceed the
value of the home at the time the loan must
be repaid. Moreover, if the home is sold and
the sales proceeds exceed the amount owed
on the reverse mortgage, the excess money
goes to the borrower or the borrower’s
estate.
Reverse mortgages are offered by banks, mortgage
companies, and other financial institutions.
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