Reverse
Mortgage
A
reverse mortgage is a special type of loan made to older homeowners
to enable them to convert the equity in their home to cash to
finance living expenses, home improvements, in-home health care,
or other needs.
With
a reverse mortgage, the payment stream is "reversed." That is,
payments are made by the lender to the borrower, rather than
monthly repayments by the borrower to the lender, as occurs
with a regular home purchase mortgage.
A
reverse mortgage is a sophisticated financial planning tool
that enables seniors to stay in their home -- or "age in place"
-- and maintain or improve their standard of living without
taking on a monthly mortgage payment. The process of obtaining
a reverse mortgage involves a number of different steps.
The
first, most widely available reverse mortgage in the United
States was the federally-insured Home Equity Conversion Mortgage
(HECM), which was authorized in 1987.
A
reverse mortgage is different from a home equity loan or line
of credit, which many banks and thrifts offer. With a home equity
loan or line of credit, an applicant must meet certain income
and credit requirements, begin monthly repayments immediately,
and the home can have an existing first mortgage on it. In addition,
there is no restriction on the age of borrowers.
In
general, reverse mortgages are limited to borrowers 62 years
or older who own their home free and clear of debt or nearly
so, and the home is free of tax liens.
Borrowers
usually have a choice of receiving the proceeds from a reverse
mortgage in the form of a lump-sum payment, fixed monthly payments
for life, or line of credit. Some types of reverse mortgages
also allow fixed monthly payments for a finite time period,
or a combination of monthly payments and line of credit. The
interest rate charged on a reverse mortgage is usually an adjustable
rate that changes monthly or yearly. However, the size of monthly
payments received by the senior doesn't change.
Some
reverse mortgage products also involve the purchase of an annuity
that can assure continued monthly income to the senior homeowner
even after they sell the home.
The
size of reverse mortgage that a senior homeowner can receive
depends on the type of reverse mortgage, the borrower's age
and current interest rates, and the home's property value. The
older the applicant is, the larger the monthly payments or line
of credit. This is because of the use of projected life expectancies
in determining the size of reverse mortgages.
Seniors
do not have to meet income or credit requirements to qualify
for a reverse mortgage.
Unlike
a home purchase mortgage or home equity loan, a reverse mortgage
doesn't require monthly repayments by the borrower to the lender.
A reverse mortgage isn't repayable until the borrower no longer
occupies the home as his or her principal residence.
This
can occur if the sole remaining borrower dies, the borrower
sells the home, or the borrower moves out of the home, say,
to a nursing home.
The
repayment obligation for a reverse mortgage is equal to the
principal balance of the loan, plus accrued interest, plus any
finance charges paid for through the mortgage. This repayment
obligation, however, can't exceed the value of the home.
The
loan may be repaid by the borrower or by the borrower's family
or estate, with or without a sale of the home. If the home is
sold and the sale proceeds exceed the repayment obligation,
the excess funds go to the borrower or borrower's estate. If
the sales proceeds are less than the amount owed, the shortfall
is usually covered by insurance or some other party and is not
the responsibility of the borrower or borrower's estate. In
general, the repayment obligation of the borrower or borrower's
estate can't exceed the value of the property.
In
general, a borrower can't be forced to sell their home to repay
a reverse mortgage as long as they occupy the home, even if
the total of the monthly payments to the borrower exceeds the
value of the home.
