There are several ads from financial institutions that prompt senior citizen to make use of the equity built on their homes. These ads are basically about reverse mortgage (RM). This is a type of loan which allows the senior homeowners to defer their monthly mortgage payments, and the money thus saved can be used to for other expenses. Thus, RM can actually let them lead a financially relaxed life. This might appear simple; however, there are few things about the reverse mortgage that many might not know.
Reverse mortgage essentially is a kind of loan for senior homeowners who are 62 years of age or older. Through reverse mortgage, banks or financial institutions allow them to get a loan depending on the value of their homes. The specialty of a reverse mortgage is that, unlike the standard mortgage, borrowers do not have to start repaying the debt immediately. Instead, they can defer the repayment till they vacate the home or pass away. In either of the scenarios, the financial intuition will then extract the payment by selling the home, or from their remaining estate.
Who administers Reverse Mortgage?
The Home Equity Conversion Mortgage (HECM) is supervised by the Federal Housing Authority (FHA), which offers insurance against reverse mortgages. This is to ensure that banks and financial institutions in the mortgage industry who lend the reverse mortgage can regain the investment in case the amount accrued from the sale of the home is less than the loan balance.
What has age got to do with the RM?
The reverse mortgage is seen as a financial tool for homeowners who have been repaying the mortgage on their homes throughout their working life and wish to improve their financial condition after retirement. As this is a home equity loan seniors aged 62 or above, it has been deliberated to ensure their financial stability in retirement years. Not having to continue paying the loan can be beneficial for them as most have to manage with a fixed income.
How is the amount for RM determined?
The exact loan amount for a reverse mortgage is usually determined based on various factors. These usually include the balance amount remaining on the home-loan, the total value of the house, other housing loans taken by the homeowner and his/her age. The older the homeowner, the higher the amount of the loan he or she can get. Moreover, the age of the youngest spouse is also an important factor taken into account while calculating the amount of reverse mortgage.
How is the RM repaid?
Senior homeowners going for mortgage services can collect the loan amount either as a monthly payment or as lump sum amount. Once received, the homeowners do not have to repay the amount as long as they and their spouses live in the house. The payment becomes due only when they move out or pass away.
However, if they or their heirs decide to sell the property, it is the reverse mortgage loan that has to first paid off with the proceeds from the sale. If the amount accrued is lesser than the value of the home, then the whole amount goes into the repayment of the reverse mortgage, and it is considered paid.
Are there any restrictions that come with the RM?
In a reverse mortgage, just like the traditional mortgage or home loan, the lending institution has a lien on the property, but it does not mean it owns it. The homeowners are the ones to whom the house belongs. But when the house is sold, the lending institution has the first claim on the proceeds from its sale. As far as the restrictions are concerned, one needs to understand that a reverse mortgage is an owner-occupied loan. As per the rules, it is mandatory for the homeowner who has opted for the loan to occupy the house as a primary residence. This means that the homeowner cannot provide the property on rent or lease it to another resident.
As the homeowners legally own the property, it is important to note that they are still responsible for the payment of taxes insurance, and other costs that come with owning a property. If they are not able to pay these expenses, it could result in default. In some cases, it can also lead to immediate repayment of the reverse mortgage as well.
While the whole thing may sound simple after reading this article, it is still advised that all potential reverse mortgage applicants seek the assistance of a certified reverse mortgage counselor before filing the application. This will not just clear their individual doubts but can also protect them against legal implications in the future.
- Reverse Mortgage allows the senior homeowners, aged 62 or above, to use the equity built on their house.
- They can then defer their monthly mortgage payments, and the money thus saved can be used to for other expenses.
- The older the homeowner, the higher the amount of the loan the homeowner can get.
- Senior homeowners going for a reverse mortgage can collect the loan amount either as a monthly payment or as lump sum amount.
- As the homeowners legally own the property, they are still responsible for the payment of taxes insurance, and other ownership costs.