Reverse Mortgages
MA reverse mortgage is a special type of loan made to older
homeowners to enable them to convert the equity in their
home to cash to finance living expenses, home improvements,
in-home health care, or other needs.
With a reverse mortgage, the payment stream is "reversed."
That is, payments are made by the lender to the borrower,
rather than monthly repayments by the borrower to the
lender, as occurs with a regular home purchase mortgage.
A reverse mortgage is a sophisticated financial planning
tool that enables seniors to stay in their home -- or "age
in place" -- and maintain or improve their standard of
living without taking on a monthly mortgage payment. The
process of obtaining a reverse mortgage involves a number of
different steps.
The first, most widely available reverse mortgage in the
United States was the federally-insured Home Equity
Conversion Mortgage (HECM), which was authorized in 1987.
A reverse mortgage is different from a home equity loan or
line of credit, which many banks and thrifts offer. With a
home equity loan or line of credit, an applicant must meet
certain income and credit requirements, begin monthly
repayments immediately, and the home can have an existing
first mortgage on it. In addition, there is no restriction
on the age of borrowers.
In general, reverse mortgages are limited to borrowers 62
years or older who own their home free and clear of debt or
nearly so, and the home is free of tax liens.
Borrowers usually have a choice of receiving the proceeds
from a reverse mortgage in the form of a lump-sum payment,
fixed monthly payments for life, or line of credit. Some
types of reverse mortgages also allow fixed monthly payments
for a finite time period, or a combination of monthly
payments and line of credit. The interest rate charged on a
reverse mortgage is usually an adjustable rate that changes
monthly or yearly. However, the size of monthly payments
received by the senior doesn't change.
Some reverse mortgage products also involve the purchase of
an annuity that can assure continued monthly income to the
senior homeowner even after they sell the home.
The size of reverse mortgage that a senior homeowner can
receive depends on the type of reverse mortgage, the
borrower's age and current interest rates, and the home's
property value. The older the applicant is, the larger the
monthly payments or line of credit. This is because of the
use of projected life expectancies in determining the size
of reverse mortgages.
Seniors do not have to meet income or credit requirements to
qualify for a reverse mortgage.
Unlike a home purchase mortgage or home equity loan, a
reverse mortgage doesn't require monthly repayments by the
borrower to the lender. A reverse mortgage isn't repayable
until the borrower no longer occupies the home as his or her
principal residence.
This can occur if the sole remaining borrower dies, the
borrower sells the home, or the borrower moves out of the
home, say, to a nursing home.
The repayment obligation for a reverse mortgage is equal to
the principal balance of the loan, plus accrued interest,
plus any finance charges paid for through the mortgage. This
repayment obligation, however, can't exceed the value of the
home.
The loan may be repaid by the borrower or by the borrower's
family or estate, with or without a sale of the home. If the
home is sold and the sale proceeds exceed the repayment
obligation, the excess funds go to the borrower or
borrower's estate. If the sales proceeds are less than the
amount owed, the shortfall is usually covered by insurance
or some other party and is not the responsibility of the
borrower or borrower's estate. In general, the repayment
obligation of the borrower or borrower's estate can't exceed
the value of the property.
In general, a borrower can't be forced to sell their home to
repay a reverse mortgage as long as they occupy the home,
even if the total of the monthly payments to the borrower
exceeds the value of the home.
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