A reverse mortgage is a way for older Americans to draw on money from their home. The mortgage of this sort is insured by the U.S. Federal Government and is available only with FHA approved lenders. Also known as a Home Equity Conversion Mortgage (HECM), a reverse mortgage is available to U.S. citizens 62 years of age or older. The loan, which uses a part of the home’s equity as collateral, typically doesn’t have to be repaid until the last homeowner has moved away permanently or passed away.
In order to be eligible for a reverse mortgage, the homeowners need to either own the home outright or be able to show that all existing liens could be paid with the reverse mortgage. There are usually no income or credit scores required with the reverse mortgage. The loan amount depends on four factors which include the age of the homeowner (the older the better), the current interest rate, the appraised value of the home and the government-imposed lending limits. The homeowners need to have the property as their main residence and they must be able to show that they aren’t delinquent on federal debt. Interested borrowers must also participate in an information session that is given by the US Department of Housing and Urban Development (HUD). Properties that are eligible for a reverse mortgage must be comprised of 1-4 units, must have been erected after 1976 or can be a condominium. All properties must meet FHA requirements. In general, properties that are in cooperative developments are not eligible for reverse mortgage financing.
Once a homeowner has decided to get a reverse mortgage and has qualified for one, there are typically five ways that he or she can receive the money. For starters, the borrower can receive a lump sum of cash at the closing. Alternatively, they can take equal monthly payments for as long as they live in the home. A third option would be to take equal monthly payments for a fixed number of years; a fourth would be to establish a line of credit from which the borrowers can draw as they desire until the line is exhausted. As a final solution, the borrower can combine some of the options above.
The reverse mortgage allows older homeowners to take advantage of the equity they have in their home. They can finish paying off their existing mortgage with it, thus creating more cash flow for other spending. Some senior citizens also just want to have a line of credit for any expenses that may arise, or to pay off existing debts. Seniors who are living on a limited cash flow can also use the funds from their reverse mortgage to have extra cash flow for monthly expenses.
The homeowner is not required to make payments but he can choose to do so without any pre-payment penalties. Paying off the line of credit simply increases the amount of credit that is available. The loan only comes due when the last borrower in the home dies, sells the house or is out of the house for more than 12 consecutive months. The heirs then have six months to sell the house, the refinance it or to turn the home over to the lender.
Opting for a reverse mortgage is not the only way for seniors to finance their retirement, but it is a viable option that should be considered by anyone who finds they don’t have enough money to life comfortably during his or her later years.
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