A reverse mortgage is one in which a lender makes a monthly payment to the homeowner. These amounts, plus accumulated interest, are backed by a mortgage on the property. It is a loan allowing seniors who have a great deal of equity in their home to convert that equity into funds. These funds can be paid to the homeowner in a lump-sum payment, a monthly income payment, or an available line of credit. A reverse mortgage is a loan that is designed for homeowners 60 years of age and older (the age qualification applies to both spouses).

Unlike traditional mortgages, there are no monthly payments. A reverse mortgage is very expensive if you must move out of your home within the first five years. This makes them more risky for people needing in-home care.  The features make it essentially the reverse of a traditional or forward mortgage. In a reverse mortgage instead of making monthly payments, you receive the mortgage payments. It is just ONE solution or source for extra funds, to the above financial related problems. You need to also look at the suitability of this option against your financial and personal situation before making a decision to go forward with it.

The one drawback is that it is an expensive loan. In addition to regular closing costs, you’ll pay an origination fee of 2% on the first $200,000 of the loan balance and 1% thereafter, plus a mortgage insurance premium of about 2% and a monthly service charge as well but it can be a good option to go for, to raise money to meet living requirements during the retirement years. It simply allows seniors to turn the portion of their house that is debt-free (called “equity”) into cash, without having to sell their home. Seniors may use reverse mortgage proceeds for almost any purpose.  Senior home owners are taking out more than 150,000 of these every year. People who took them say the money improved their lifestyles and met their retirement financial needs.

There are no requirements of passing credit score, and there is no income proof required either, in order to qualify.  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. Borrowers must have a discussion with a certified HECM counselor before being eligible for the reverse mortgage. The counselor or agency must be approved by HUD.

Seniors make no monthly payments during the term of the mortgage and stay in their homes. Even if they use up the value of the mortgage, they cannot be forced out. Borrowers receive them for the rest of their lives no matter how long they live. Borrower is still responsible for paying ongoing property taxes. Credit is subject to age and property qualifications.

This loan is based on a rising debt/falling equity model. It 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.

This entry was posted on Saturday, September 19th, 2009 at 4:28 pm and is filed under Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.