Reverse
Mortgage
A
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.
