BRUCE C. TRUESDALE
For homeowners aged 62 or older, a Reverse Mortgage may provide an alternative to a bankruptcy at a time when income may be at it’s lowest. The reverse mortgage is an option for someone who intends to continue to live in their home for many years.
A reverse mortgage allows homeowners 62 years of age and older to access equity in their primary residence and turn that equity into cash while continuing to live in the home and retain ownership of the home and at the same time discontinue making mortgage payments. Sound to good to be true? It’s not, read on.
In a reverse mortgage the payments on the home are “reversed.” The reverse mortgage lender makes a payment to you instead of you making a mortgage payment to the mortgage company. Borrowers do not need to make any monthly payments on the mortgage for as long as they continue to live in the home. When the last borrower (assuming multiple borrowers) can no longer reside in the home, moves out or dies, the loan comes due.
Ok, you’re asking what is the catch. Well there really is no “catch” but there are some requirements that must be met. The home the reverse mortgage is taken on, must be your primary residence. It can be a single family home, a multi-unit home, a condominium or a townhouse.
The borrowers must be at least 62 years old. Older borrowers may be eligible to receive more money as the loans use actuarial tables to calculate life expectancy in calculating loan amounts. The borrowers’ income is not an issue as the loan is keyed to equity in the home mortgaged. If you currently have a mortgage that mortgage will have to be paid off by the reverse mortgage which then takes the first mortgage position. In the situation where there is a first mortgage there must be sufficient equity in the home following the repayment of the first mortgage by the reverse mortgage to allow adequate funding. A reverse mortgage lender can examine your financial circumstances and advise you.
Payment options for a reverse mortgage range from receipt of lump sum payments, a line of credit, fixed monthly payments or a hybrid combination of all of the above. The most popular payment choice is to draw on the proceeds of the mortgage through the use of a line of credit as necessary.
The costs of a reverse mortgage are somewhat higher than a conventional mortgage as there are additional insurance requirements that necessitate the higher costs. If you significantly exceed your expected life span, you may significantly out live the equity in your home. As you are permitted to live in the home for life, insurance will protect the lender in the event that you outlive all of the equity in your home. Costs vary between reverse mortgage lenders so be certain to shop for the best deal.
The costs of a reverse mortgage are incurred “up front” when the loan is cast. For this reason it may not be the most economically prudent option if you do not intend to remain in the home for a least a few years. Generally, when the reverse mortgage comes due, the home is sold to pay back the loan. The borrowers’ estate realizes cash only if the sale price of the home exceeds the loan balance. If the borrowers sell the home, or can no longer reside in the home (health requires move to nursing facility or last borrower dies) the loan must be repaid in full.
The most popular reverse mortgage program is administered by the U.S. Department of Housing and Urban Development and insured by the Federal Housing Administration.
Information on reverse mortgages can be obtained from
HUD: www.HUD.gov/offices/hsg/sfh/hecm/hecmabou.cfm; and
the National Reverse Mortgage Lenders Association: www.reversemortgage.org