If you watch TV, you have probably seen one of the recent commercials featuring a celebrity touting the benefits of reverse mortgages for senior citizens. It sounds too good to be true, right? Actually, it can be a valuable tool for senior homeowners struggling financially, if used properly.
A reverse mortgage, called a home equity conversion mortgage (HECM), originated in 1988 and is a special type of home loan that lets seniors convert a portion of the equity in their home into cash. Unlike a traditional home equity loan or second mortgage, payments are made directly to you. No repayment is required until the last surviving homeowner permanently moves out of the property or passes away. These payments do not interfere with Social Security or Medicare benefits and are tax-free until you sell the property.
In order to eligible for a reverse mortgage, all homeowners must be at least 62 years of age and the home must be free and clear of all liens. If there is a mortgage balance, it must be paid off completely with the proceeds from the loan. There are generally no income or credit score requirements, unlike traditional mortgages or home equity loans. Title remains in the homeownerís name but the bank adds a lien to the property for the amount of the debt.
Almost all types of homes are eligible for a reverse mortgage including FHA approved condominium units. The amount you can borrow is based on the homeownerís age, current interest rates and the propertyís appraised value. You can receive a lump sum payment, monthly payments or a line of credit. Prior to obtaining a reverse mortgage, you must attend a HUD approved counseling session.
Although you never have to make a monthly payment on this loan, you are still required to pay the property taxes, insurance, utilities and maintenance expenses like all homeowners. You can never be foreclosed on because this is a ìnon-recourseî loan. The loan must be repaid upon the death of the homeowner or if the homeowner has not lived in the property for 12 consecutive months, such as a move into long term care. If the proceeds from the sale exceed the amount owed ( Plus expenses such as interest) the balance belongs to the estate. If the proceeds are not enough to repay the loan, the lender must take a loss and request reimbursement from FHA. No other assets of the estate, such as cars, investments, etc. can be taken to pay off the deficiency.
There can be substantial fees involved in these type of loans, sometimes up to 10% of the loan amount and unless you choose a lump sum payment the interest rates can be adjustable. This is not the best option for someone who is looking for a short term loan, or does not plan on staying in their home for very much longer. Also, if you are having trouble maintaining your home, you may be better off to sell your home and purchase a condo or smaller, low maintenance property. However, if you wish to remain in your home and need extra income to do so, a reverse mortgage may be the answer.
For more information on reverse mortgages, talk to a FHA approved lender or visit HUDíS website at HUD.GOV and search reverse mortgages.
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