The term reverse mortgage is everywhere these days. It often appears in commercials or appears in web searches. But you may not understand what it is exactly.
In short, it is a unique home loan that allows homeowners to convert part of their equity into cash. This equity that the homeowner has built up over the years paying for his home can now be returned to him in installments. In a typical mortgage situation, the borrower pays the lender, and each payment reduces the amount owed and builds the borrower’s equity in the home. In a reverse mortgage, the borrower receives payments from the lender, and each payment increases the loan balance and decreases equity.
Who provides these loans?
Most of these loans come from the Federal Housing Administration (FHA) and are known as a Home Equity Conversion Mortgage or HECM. A HECM is guaranteed by the FHA so that the borrower does not have to worry about not receiving payments from their lender.
Who is eligible for these loans?
To qualify for this type of loan, homeowners must be 62 years of age or older and have significant equity in their home. In addition, to obtain a HECM, homeowners must fully own their home or the balance they owe on their home must be low enough to be paid off with the proceeds of the reverse loan at closing. In addition, the borrower must live in the home and be able to pay recurring costs associated with the property, including taxes and insurance. Finally, before getting the loan, borrowers must receive information from a HECM advisor. Applicant’s home must be a single-family home, a HUD-approved condominium, or a manufactured home that meets FHA requirements, or a two- to four-unit home if the borrower lives in one of the units.
How much can you borrow?
The amount a homeowner can borrow with a reverse mortgage varies depending on their age, the value of the home and the interest rate on the loan. In most cases, older homeowners can borrow more money, and the more a home is worth or the more equity its owner has, the more the owner can borrow. Lower loan interest rates also increase a homeowner’s borrowing power.
How do I receive my money?
With a HECM, borrowers have several choices to receive their payments. Borrowers can choose to receive a lump sum when taking out the loan or the borrower can take out a line of credit. This line of credit can be used as the borrower chooses and grows over time. A borrower can also choose to receive payments in the form of a monthly annuity. A fixed monthly annuity is a monthly payment that the borrower receives for the entire time he lives in the house. A term monthly annuity is a monthly payment that the borrower receives for a specified period of time that they choose. Borrowers can also choose to combine these options, for example by choosing to receive a monthly annuity, but also by taking cash when taking out. Paying a small fee also allows borrowers to switch from one option to another.
A reverse mortgage can be a beneficial source of income for seniors. By researching the pros and cons of this type of loan, homeowners can determine if it’s right for their financial situation.
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