A Reverse Mortgage is a tool that enables you to use the equity in your house without selling it or making payments for the remainder of the time you live in the house. The value of a house is generally divided into debt and equity. A higher equity and lesser debt means a greater part of the house is owned by you and vice-versa. In a conventional mortgaging process, the payments you make on your loan decreases the amount of your debt and increases your equity. If you continue to live in your home long enough, you will clear all your debt and own it completely.In a reverse mortgaging procedure, your equity is used to eliminate your mortgage payment and your debt will increase over time because you wont make monthly payments for the life of the loan. At the end of the reverse mortgage (when you move out or pass on), your heirs get to determine if they would like to purchase the home or allow the lender to sell off the home to pay back the mortgage.
Eligibility Requirements for Reverse Mortgage:
Home Equity Conversion Mortgage or HECM is the most popular type of reverse mortgage program. You could get a HECM from any private lender approved by the Federal Housing Administration (FHA). However, there are certain requirements that need to be met before getting a HECM. Some of them are as follows:
- The homeowner must at least be of 62 years in age.
- It is applicable only to primary residences.
- The home does not need to be paid off; however sufficient equity must be present.
- A certificate of occupancy is mandatory.
- The home must meet the Department of Housing and Urban Development’s (HUD) minimum standards for property.
- Counseling from a HUD approved agency is mandatory.
Payment options in a reverse mortgage:
There are several factors that affect the amount of money you can derive from a reverse mortgage such as the age of the person on the property title, the interest rate, the equity in your house, and sometimes even the location matters. If you have an outstanding traditional mortgage, you will have to pay it off with your reverse mortgage funds at closing. You can even have a reverse mortgage plan just to pay off your traditional mortgage to eliminate your current mortgage payment.
Generally, a reverse mortgage consists of five modes of payment.
- Term payment: In this method, you will receive payments every month for a predetermined period of years. These payments are determined based on your equity and the length of the term.
- Tenure payment: In this method, you will be receiving payments every month for your life span.
- Line of credit: Line of credit is a financial arrangement that enables you to borrow your loan amount at anytime and as many times as you want untill the entire amount has been withdrawn. In a HECM the limit of the borrow-able amount grows significantly over time.
- Modified term payment: In this method, you will be receiving payments for a predetermined period of years and also have a line of credit.
- Modified tenure payment: In this method, you will be receiving payments for your life span and also have a line of credit along with it.
Usually, a reverse mortgage loan will be due only when all the people on the title to the property stop residing there for over a period of 6 months and in cases of medical reasons and death, the period is further extended by 6 months.
It is important to keep in mind that although you will NOT have a mortgage payment throughout the term of this mortgage you must continue to keep current with property taxes and home owners insurance.
You must always make sure to read all the loan documents before getting a reverse mortgage on your home.
You must also know that reverse mortgage loans are non-recourse loans. This means that the lender cannot legally collect anything greater than the current value of the house from your heirs or from you whenever the loan is due for repayment.
