If you have been looking for a mortgage recently then you might (should) have done some research, if you have then you might have come across the term “reverse mortgage” and wondered just what this could mean.
Well, to put it clearly, a reverse mortgage is essentially an equity loan that is secured by your home, which is designed to defer the mortgage interest.
The most comment type is the Home Equity Conversion Mortgage, created by the Federal Housing Administration in 1989. With a traditional mortgage you are required to make monthly payments over a specified amount of time (normally 30 years). With a reverse mortgage you don’t have to pay the interest until the loan reaches maturity. as long as you reside at the property, and pay property taxes and insurance.
This is what many people who take up the reverse mortgage option opt for.
For more information see Reverse.Mortgage
You own your home
When you take out a reverse mortgage it is important to know that you will still own your home – many people are under the misguided belief that you are selling your home. You continue to own your property, paying the taxes and insurance as before. Just like a normal mortgage you will receive a monthly statement – but you won’t have a slip to send payment.
What are the qualifications?
Reverse mortgages are available to all US citizens and Permanent Residents age 62 or older with substantial equity in their home. The maximum you can loan is dependent on the youngest homeowner’s age at the time of applying, home value, and what the current interest rate might be. There will be no credit score or income score as there are no monthly repayments. You are required to continue living in your home and continue to pay the properties taxes and insurance.
You’re in the driver’s seat
You can actually make repayments of the mortgage interest in part or full whenever you desire. You can also deduct the mortgage interest just like you would with a traditional loan and you can even pay off the entire loan at any time with either cash, refinancing or selling the property.
Many people believe that once you take out a reverse mortgage then the banks will take all the equity and leave your heirs with nothing but a pile of debt. This is not true, while nobody can say for certain what your homes appreciation will be, you can rest assured that you heirs will not inherit your reverse mortgage.
How is the loan repaid?
If you choose not to make any voluntary repayments then the reverse mortgage is not due until the last surviving homeowner passes away or moves out of the property. When one of these happens the heirs will be given up to 12 months to sell or refinance the property to settle the loan. If they do not act within the 12 months then the lender will foreclose on the property and sell it, if the sale does not met the loan amount then the government insurance you would have taken out will be used to make up the shortfall.
If there is additional money left after the sale of the house then this will be given to the heirs.
Who is it for?
Anyone who can not meet their needs on their current income, but wish to remain in their home.
Who is it NOT for?
There are costs involved when setting up a reverse mortgage (appraisal and origination charges) so it is not recommended for homeowners who do not intend to live in their property for a reasonable amount of years after taking out the reverse mortgage.
What about taxes?
Cash received by any mortgage is not considered income and will not be taxed.
Although reverse mortgages do not affect public benefits such as social security, there can be a problem for people who are receiving “needs based” state or local assistance. This is not just exclusive to a reverse mortgage though.
Don’t just go for the first offer, shop around first and take a few quotes from banks and brokers before you take the plunge.