Mortgage Articles – For the smart consumer

How a Reverse Mortgage Works
A reverse mortgage is a loan, but unlike traditional loans it carries no minimum income requirements or monthly payments.  A reverse mortgage is a loan against your home’s equity, or the value that accrues throughout the period that you own the home.

Reverse mortgages are not the best option for every homeowner, but in many cases these programs can help older adults stay in their homes for a longer period of time than they otherwise might be able to.

The basic premise of a reverse mortgage program is that the homeowner borrows a loan for some percentage of the equity in their home.  That amount is then disbursed to the homeowner and no payments are required until the last reverse mortgage borrower moves from the home.

Research Your Options Before Determining Whether a Reverse Mortgage is Right for Your Situation and Selecting a Lender
Home equity conversion mortgages (HECM) are the only reverse mortgages that are eligible for federal insurance, which provides additional security for the borrower’s interests. The loan costs of an HECM are generally less than those of other reverse mortgage programs, and the loan amount is almost always higher than what other loan programs can provide.

Some state agencies have reverse mortgage programs that offer better benefits and even lower costs to borrowers, but they usually restrict how you can spend the money received.  This type of reverse loan might be appropriate when you are considering a reverse mortgage in order to make large-scale home improvements or updates.

Shop carefully, just as you would if you were looking for the right lender and program for a mortgage to purchase a home.

Tell the Lender How You Would Like the Loan to be Disbursed
Unlike most traditional mortgages, a reverse mortgage allows the borrower to choose one or several of the available disbursement options.  You may opt to receive a lump-sum payout, a monthly payment (to you, not to the lender), or a line of credit. 

With the lump-sum payment, you receive a check at the time the loan is closed.  The amount varies depending on your age and other factors. 

A monthly payment is an additional source of tax-free monthly income.

A line of credit means that you can make a request when you need cash and a check will be sent to you.

Reverse Mortgage Distributions are Tax-Free
Many older adults need an additional source of income above and beyond their standard monthly income. A tax-free loan that requires no payments for as long as the owner lives in the home is a fabulous solution for these homeowners.

Reverse Mortgages are Age-Specific and Your Home Might Need to Meet Additional Criteria
Lenders take many factors into consideration when you apply for a reverse mortgage.  Among these factors are the home’s age, location, condition, and appraised market value. Also, you must be at least 62 years old to be eligible to borrow a reverse mortgage.

If you elect to borrow an HECM, your home must meet the minimum standards defined by the federal government.  The home must also be at least one year old.

If you own a mobile home or cooperative housing, you will not be eligible to borrow an HECM, although other programs may be available to you.

One of the most common misconceptions about reverse mortgages is that when you borrow one, the bank owns your home. This is not true.

Reverse Mortgages are Legitimate
When reverse mortgage programs first began to appear, very few lenders offered or even recommended the programs.  Much of the controversy surrounding reverse mortgages arose when people did not fully understand the premises of the programs.  Fortunately, with the passage of time, more reverse mortgage companies are willing to offer reverse mortgage products. 

Reverse Mortgages are Simple
As a homeowner, you can borrow up to the maximum value of your home’s equity through a mortgage loan.  Unlike traditional mortgage programs, a reverse mortgage pays you, and you never need to pay back the money borrowed unless and until you choose to move out of your home.  When this happens, the sale proceeds often cover the balance of the reverse mortgage.

The Homeowner Maintains Control Over Taxes and Insurance
When you take out a reverse mortgage, you choose which insurance company you would like to work with and you are still responsible for paying taxes.  In traditional arrangements, the mortgage company generally pays the taxes and homeowner’s insurance through an escrow account established for the borrower.

You Can Pay Off Your Home With a Reverse Mortgage
Many people are unaware that reverse mortgage disbursements can be used for any purpose, including paying off your home or other debt.  However, note that if your home is not paid off, you will not be eligible to borrow from a reverse mortgage program. 

At age 62 and beyond, most homeowners owe little or nothing on their homes.  Therefore, it might be a wise decision to borrow enough to pay off the existing mortgage and put a little money aside in case of an emergency.

You Can Spend the Money Received Through a Reverse Mortgage However You Would Like
There are almost no restrictions on the way you spend the money from a reverse mortgage.  The money is yours, and you can use it to travel, reduce debt, pay for medical care, or pay for a grandchild’s education.

As mentioned above, some state-sponsored reverse mortgage programs do restrict how the loan proceeds can be used.  Ask potential lenders about these requirements while you are looking for the best program for your specific circumstances.

You Still Own Your Home
One of the most common misconceptions about reverse mortgages is that when you borrow one, the bank owns your home. This is not true. As a matter of fact, you can choose to pay off your reverse mortgage at any time.

You Will Never Lose Your Home for as Long as You Continue to Live There
Most borrowers choose to sell their home and use the sale proceeds to pay off their reverse mortgage.  However, you always have the option of paying it off with other resources.  You may pass your home on to a child if the reverse mortgage has been paid off.

Most reverse mortgages have a time limit, but this does not mean that you will have to pay if you live in your home for a period of time that exceeds the loan period.  Instead, you will simply need to extend the loan period. Fortunately, consumer protection for older adults has improved in recent years.

If you are considering a reverse mortgage, investigate your options thoroughly.  Interview potential lenders and ask about the fees, requirements, and minimum standards that your home must meet in order for you to be eligible. Also, ask a friend or family member to assist you in researching the possibility of taking out a reverse mortgage.