Reverse Mortgage

Reverse mortgages are a type of home equity loan where homeowners receive cash in lieu of some equity of the house and the lender gets a lien against the home. Reverse mortgages are different in the sense that homeowners do not have to make regular payments to the mortgage lender and they do not need to repay the loan at all till the time they continue to live in the house.

Types of reverse mortgages

There are 3 types of reverse mortgages, as listed below:

  • HECM/Home Equity Conversion Mortgage: This is the most popular kind of reverse mortgage and is backed by the U.S. HUD/Department of Housing and Urban Development. It does not impose any restrictions on the manner in which the money received is used by the homeowner. Also, it comes with many payment options that provide flexibility with regards to tapping into the equity of the house.
  • Single-purpose reverse mortgage: This type of reverse mortgage is offered by state, local, and non-profit agencies. It is available for funding one purpose, like payment of property taxes or for house repairs.
  • Proprietary reverse mortgage: It is offered by private lenders. It permits homeowners to borrow large amounts of money. It can however be availed by only those whose properties have high value appraisals.

Eligibility criteria for HECM reverse mortgages

The basic criteria for getting HECM reverse mortgages are as follows:

  • The house must have large equity or must be owned
  • One or more borrowers have to be 62 years old, or older
  • The house must be the main residence of the borrower
  • The house has to be in good condition
  • The borrower has to take part in a informational counseling session for reverse mortgage with the HUD.
  • The insurance and property taxes should be fully paid

What happens in a reverse mortgage?

When a homeowner takes out a reverse mortgage, then he/she does not have to make the monthly mortgage payments any longer. Instead, the bank or other lenders will pay the homeowner. Such payment from the lender can be availed as a lump sum, as monthly payments, or as a line of credit.

The money is loaned by the bank/lender on the basis of the property’s current market value. Borrowers can continue to reside comfortably in the house for the rest of their lives and enjoy the additional income derived from the house that they paid for a significant period of their lives.

The reverse mortgage loan gets repaid when the borrower passes away or when the property is sold. This repayment amount will include the total amount that is borrowed as reverse mortgage, plus applicable interest. During this stage of repayment of the reverse mortgage loan, the house equity that remains belongs to the homeowner/borrower, the heirs to the estate, or the surviving spouse.

Reverse mortgages can be great way to supplement the retirement funds which may not be sufficient for seniors in today’s economy. It can offer the seniors with more financial independence and allow them greater breathing space to be able comfortably live in their old age.