A Reverse Mortgage is a special type of loan that allows a senior homeowner to convert part of their home’s equity into cash or income, without having to make regular monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. The borrower can’t default on the loan or be forced to move, as long as they live in the home, pay the property taxes and insurance and maintain the home.
The Daily World, in “Reverse mortgages—your questions answered,” explains that in order to qualify, the homeowner must be 62 years of age or older and pass a credit check. The home also has to be used as the primary residence.
With a reverse mortgage, the homeowner retains the title and ownership during the life of the loan and can opt to sell the home at any point. The home can have an existing mortgage. Many borrowers apply the reverse mortgage funds to pay off any existing mortgage and eliminate the monthly mortgage payments.
The amount of money one can receive from a reverse mortgage is determined by the following: (i) the age of the youngest spouse; (ii) the value of the home; and (iii) the current interest rate.
The money from a reverse mortgage can be received in a lump sum, in monthly payments, or through a line of credit. It can also be any combination of these options.
Reverse mortgages are insured by the Federal Housing Authority and the Department of Housing and Urban Development (FHA/HUD). If something happens to the lender, HUD takes over the loan and become the reverse mortgage servicer.
The fine print: It is important to understand that because the borrower makes no monthly payments, the interest on the reverse mortgage loan will accumulate over time, increasing the balance due. Depending on when you sell or move, you may have little or no equity left in the home. However, today the law protects the borrower and their heirs from ever owing more than 95% of the market value of their home at the time the loan becomes due.
Reference: The Daily World (November 18, 2016) “Reverse mortgages — your questions answered”