The Basics of Reverse Mortgage
- posted 4.8.2014
- Ashley Bailey
- Home Loans
Reverse mortgages tend to get a bad rap mostly because people don't understand exactly what a reverse mortgage is. This program doesn't benefit everyone, but if you are at least 62 years old and have positive equity in your home it may be right for you.
A Reverse Mortgage is a government backed loan that allows you to pull equity out of your home and is tax-free. Funds from this transaction will not have any negative effect on your social security, Medicaid or Medicare. In comparison to a traditional mortgage, a reverse mortgage will reverse your payments and gives you back the money you previously paid over the course of the loan.
There are several reasons one may choose a reverse mortgage. If you are in the eligible age range and, own your house outright or have little left to pay on it you might ask yourself the following questions:
- Do I want to increase my monthly income/supplement Social Security?
- Can this help me remain independent/ financially from my family?
- Do I want to take some time to travel?
- Do I need to increase cash reserves/ get a lump sum of cash?
- How can I be financially prepared for unexpected medical expenses?
- How can I get funds to make home improvements?
You and your home must meet the following terms in order to qualify:
- 62 years of age or older
- You must own at least 40%-50% of your home
- This home is your primary residence
- The home is a single family home, approved condo, townhome, or a 2 to 4 unit property
- You completed the HUD approved senior counseling
In order to qualify for a reverse mortgage you must complete HUD approved counseling. Visit HUD.gov for a complete list of counselors nationwide.
Determining the Amount of Funds
The amount of money you receive from a reverse mortgage depends on the following factors:
- Age of the borrower
- Value of home
- The County where the home is
- Interest Rates
Receipt of Funds
You are able to receive the funds of your reverse mortgage in the following ways:
- Lump Sum
- Tenure Payments
- Line of Credit
- Modified Term
- Modified Tenure
Repayment is required once the mortgage is called due and payable. This has to be paid in full and within a times manner. Repayment can begin on a reverse mortgage after the death of the borrower, moving/purchasing anew primary residence or if the borrower has to move into a nursing home. If the borrower passes away the outstanding loan balance will not be passed down to his or her heirs. If there is positive equity, the heirs can chose to sell or refinance; if the house has negative equity, they can chose to buy the house for 95% of the current appraised value. A reverse mortgage can only be applied to a primary residence; if you move or purchase a new home the balance of the loan still needs to be repaid. This also applies if a borrower is forced into going to a nursing home.
If you cannot repay the reverse mortgage or you decide to not pay, the alternative option would be to give up the title or ownership of the home.