Many senior citizens face their retirement years on a fixed income and with much of their net worth locked up in their home equity. If they need or want extra cash for any purpose, it can be difficult to get a loan because of their limited income. In cases like these, a reverse mortgage may be the solution.
Limited to senior citizens age 62 and up, reverse mortgages allow homeowners to borrow against the equity in their home without having to make monthly payments on the loan. Instead, the loan is paid back when the borrower dies, sells the home, or moves out permanently (such as to a nursing home). The total debt that must be paid back at that time will include the original amount borrowed, plus interest on the loan.
Borrowers can get money from their reverse mortgage lender in three ways. They can get a one-time lump sum, a regular monthly payment, or a line of credit to be used as needed. The amount of money a homeowner can borrow depends on two factors: how much his home is worth, and his age. If there is more than one owner of the home, the loan will be based on the age of youngest owner, who must be at least 62 years old. The older the homeowner, and the more the home is worth, the more money can be borrowed.
With a traditional mortgage or home equity loan, borrowers pay back a certain amount of money each month plus interest. As they do so, the equity in their home increases over time and the loan balance decreases. With a reverse mortgage, the opposite is true. For the duration of the reverse mortgage, home equity decreases and the debt increases.
When it’s time to pay back the loan (when the homeowner dies, sells the home, or moves out), if the home is worth more than the debt owed, the homeowner (or his estate) keeps the excess equity. In rare cases, the debt owed exceeds the value of the home. This could happen in communities where property values have fallen, for instance. In this case, the borrower can rest easy – according to law and the terms of his loan, he only has to pay back the actual amount the house is worth, and no more.
In most cases, the money can be used for any purpose. Borrowers don’t have to make monthly payments on the loan, of course, but they do still have some financial responsibilities. Homeowners must continue to payproperty taxes and homeowners’ insurance. They must also continue to maintain and repair their home. Failure to do any of these things could cause the loan to go into default, which means the lender can demand that the loan be repaid immediately. Borrowers should always make sure they understand the terms of their mortgage and abide by the terms of the agreement.
The two most common types of reverse mortgages are the Home Equity Conversion Mortgage (HECM) and the Proprietary Reverse Mortgage (PRM). HECM loans are insured by the federal government and are available from FHA-approved lenders in every state. Closing costs for HECM loans are usually lower than other reverse mortgages. However, there are limits to how much a homeowner may borrow with an HECM loan. Depending on where the home is located, HECM borrowers are limited to loans of approximately $155,000 to $280,000.
Proprietary Reverse Mortgages offer another option. PRM loans have higher closing and administrative costs, and they are not insured by the federal government. They are not as widely available as HECM loans. However, PRM loans do not have the same borrowing limits as HECM loans. This means that homeowners can borrow more than $280,000, as long as they have enough home equity.
When shopping for a reverse mortgage, it’s important that borrowers carefully evaluate each loan. The total annual loan cost, or TALC, helps borrowers compare one loan to another accurately. Lenders are required to provide borrowers with this figure. Regardless of the type of reverse mortgage, the longer a borrower lives in his home, the lower the total annual loan cost will be. Homeowners who expect to live in their homes less than five years are not good candidates for a reverse mortgage.
For more information about reverse mortgages, visit:
AARP: A Loan in Reverse
You may also look Reverse Mortgages up at Wikipedia or try: Reverse.org for more information. Make sure you have all the information in your hands before you apply for this type of mortgage since it is a big decision. Also check out our comparisons of AARP credit cards and your choice of Mortgage Lenders online.