What are Reverse Mortgages? They are loans for seniors age sixty-two and over. Home Equity Conversion Mortgage (HECM) Reverse Mortgages are insured by the Federal Government. Reverse Mortgages are part of the Federal Housing Administration (FHA). It works on the principle that you give up the equity to the bank, to eliminate mortgage payments and receive cash payments. Equity is the market value of the homeowner’s interest in their real property. It is the difference between the fair market value of the home against all of the liens on the home. These loans are also called a non-recourse loan.

Senior homeowners often use these payments to pay for home renovations, pay medical bills, or procedures. Homeowners with existing loans often use reverse mortgages to pay off that mortgage and eliminate those monthly payments. Homeowners can take this money in a few different it is called the distribution of funds:

  1. A line of credit – you can draw what you need up to the maximum amount of the loan.
  2. Lump Sum -Taking the full amount of the loan at closing.
  3. Tenure – Monthly payments up to the full amount of the loan.
  4. Term – Monthly payments for a specified number of years.

This is where it gets tricky. Borrowers may access the greater of 60% of the loan amount. They also must comply with any HECM requirements. Also, they may have to set aside a certain amount to pay for taxes and insurance.

To be eligible you must be 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off with the reverse loan, You must live in the home, and have the financial resources to pay taxes, insurance, and upkeep on the home. The home must be a single-family home or a multi-family home with the owner living in one of the units. Hud approved condos and FHA approved mobile homes may also qualify.

If you are still alive at the end of the loan, want to leave an inheritance, you live with another person or you cannot afford the taxes, insurance or upkeep of the home; this loan is not for you. The loan must be repaid, although if it is sold for less than your loan amount after you die, FHA absorbs the balance owed. The family can choose to repay the loan to keep the house in the family. Your family will have to refinance 95% of the value of the home or the balance of the loan whichever is lower.  If you live with your spouse they will be required to pay the loan or move out so the house can be sold. If your heirs want nothing to do with the home, they will not be responsible for the loan FHA will sell the home for repayment of the home.

This loan would be perfect for individuals that have no spouse or other family members. If you decide on this loan make sure you set aside money for taxes, insurance, and upkeep. They do check on the home to make sure these are done. Also if you move out of the house for more than a year the loan becomes due. Please make sure that this loan is funded by the FHA and not one of the scam companies out there.

 

References:

https://reverse.org/what-is-a-reverse-mortgage/

https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten

https://www.consumerfinance.gov/ask-cfpb/when-do-i-have-to-pay-back-a-reverse-mortgage-loan-en-236/

http://www.investopedia.com/articles/personal-finance/090115/5-signs-reverse-mortgage-bad-idea.asp?lgl=myfinance-layout-no-ads

http://www.investopedia.com/articles/personal-finance/071715/beware-these-reverse-mortgage-scams.asp?lgl=myfinance-layout-no-ads

https://www.csmonitor.com/Business/2011/0309/Suze-Orman-Know-the-risks-rewards-of-reverse-mortgages

https://www.thearamcogroup.com/ReverseMortgageFrequentlyAskedQuestions

https://www.onereversemortgage.com/blog/2014/03/reverse-mortgages-a-non-recourse-loan/

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