What Is Reverse Mortgage

One source of income for older homeowners is an arrangement known as a reverse mortgage. Reverse mortgages give older homeowners a chance to use the accrued equity in the home as collateral and allow the homeowners to continue to live in the home while receiving a lump sum payment or an annuity to help cover the costs of retirement or any other expenses. Reverse mortgages are available only to homeowners over the age of 62 who meet certain requirements, including residing in the home in question. Typically, income levels and past credit problems are not major factors in qualifying for these loans.

Five qualifying factors are considered by the financial institution when determining how much to lend against the home:
• The property’s current value and condition
• How the money will be disbursed
• Current interest rates
• The age of the borrower
• The amount of any mortgages or liens outstanding against the property

Typically, older borrowers are eligible to receive more money than younger applicants; this is because the loan is expected to be of shorter duration in these cases due to probable life expectancy. Additionally, homeowners who take their funds in the form of a line of credit usually receive a larger amount than those who elect to receive funds via another method. Most reverse mortgages are disbursed using one of five methods.
• Line of Credit: Borrowers can withdraw any amount needed up to the limit established by the lender at any time of their choosing
• Term: Regular monthly payments for a specified length of time
• Tenure: Regular monthly payments for as long as at least one borrower remains alive and residing in the home
• Modified Tenure: Combines aspects of a line of credit loan with a tenure loan, allowing withdrawals and providing monthly payments as well
• Modified Term: Combines a line of credit arrangement with monthly payments for a fixed term

Many financial institutions offer reverse mortgages; one of the most popular is offered by the FHA and is known as the Home Equity Conversion Mortgage. In order to obtain a reverse mortgage through the FHA, homeowners must either own their home free and clear or have only a small amount remaining on their mortgage; any liens or mortgages must be paid off when the reverse mortgage is finalized. The homeowners must reside in the home, and must attend a counseling session with a trained Home Equity Conversion Mortgage advisor to ensure that they fully understand the process.

Unlike traditional loans, reverse mortgages do not require any payments from the borrowers while they live in the home; instead, all funds due are collected from the estate of the borrowers. This makes reverse mortgages especially attractive for retirees who need an additional source of income for health or living expenses; since the home remains the legal property of the borrowers, they cannot be evicted from it so long as they reside in the home and continue to pay property taxes and maintain insurance as usual.

In some cases, homeowners may need to move out of the property voluntarily. This usually happens due to illness or incapacitation. If the home is not occupied by at least one of the borrowers for a twelve month period, the bank has the option to force the sale of the home in order to pay off the reverse mortgage. Usually, however, the reverse mortgage is paid off after the death of the property owners through the sale of the property or is refinanced by the heirs to the estate as a traditional mortgage arrangement.