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Reverse Mortgage - Is It For You?
Reverse mortgages have been around for a while and the Department of Housing and
Urban Development (HUD) under the Federal Housing Administration (FHA) was one of the first to offer them.Before diving into the deep end of a reverse mortgage, you need to make sure you understand what it is, if you are eligible, and what will be expected if you decide on one.
A reverse mortgage is a home loan that allows you to borrow against the equity you've built up in your home over the years. The main differences between a reverse mortgage and a more traditional mortgage are that the loan is not repaid until you no longer live in the residence or upon your death, and that you will never owe more than the home's value. You can also use a reverse mortgage to buy a different principal residence by using the cash available after you pay off your current reverse mortgage.
A reverse mortgage is not for everyone, and not everyone is eligible. For a Home Equity Conversion Mortgage (HECM), HUD's version of a reverse mortgage, requirements include that you must be at least 62 years of age, have no mortgage or only a very small mortgage on the property, be current on any federal debts, attend a session hosted by a HUD-approved HECM counselor that provides consumer information and the property must be your primary residence.
HUD bases the mortgage amount on current interest rates, the age of the youngest applicant and the lesser amount of the appraised value of the home or FHA's mortgage limit for the HECM. Financial requirements differ vastly from more traditional home loans in that the applicant does not have to meet credit qualifications, income is not considered and no repayment is required while the borrower lives in the property. Closing costs may be included in the home loan.
Stipulations for the property require that it be a single-family dwelling, a 1-4 unit property whereby the borrower occupies one of the units, a condominium approved by HUD or a manufactured home. Regardless of the type of dwelling, the property must meet all FHA building standards and flood requirements.
HECM offers five different payment plans in order for you to receive your reverse mortgage loan amount - Tenure, Term, Line of Credit, Modified Tenure and Modified Term. Tenure enables you to receive equal monthly payments for the duration that at least one borrower occupies the property as the primary residence. Term allows equal monthly payments over an agreed-upon specified number of months.
Line of Credit enables you to take out sporadic amounts at your discretion until the loan amount is reached. Modified Tenure is a combination of monthly payments to you and a line of credit for the duration you live in the home until the maximum loan amount is reached. Modified Term enables a combination of monthly payments for a specified number of months and a line of credit determined by the borrower.
For a $20 charge, you can change your payment options.
Lenders recover the cost of the loan and interest upon your death or when you no longer live in the home and your home is sold. You or your heirs receive what is left after the loan is repaid. Since the FHA insures the loan, if the proceeds from the sale of your home are not enough to cover the loan, FHA pays the lender the difference. Keep in mind that the FHA charges borrowers insurance to cover this provision.
The amount you are allowed to borrow, along with interest rate charged, depends on many factors, and all that is determined before you submit your loan application.
To find out if a reverse mortgage might be right for you and to obtain more details about FHA's HECM program, visit HUD's HECM homepage or call a representative of the National HECM Counseling Network at one of the following organizations:
*American Association of Retired Persons - 1-800-209-8085
*Consumer Credit Counseling Service of Atlanta - 1-866-616-3716
*Money Management International - 1-877-908-2227
*National Foundation for Credit Counseling - 1-866-698-6322
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