The Basics of Reverse Mortgage
In recent years there has been an influx of online and television commercials advertising reverse mortgages. These advertisements are generally geared towards senior citizens. A reverse mortgage allows a homeowner who is at least 62 years old to use the equity in their home to obtain a loan that does not have to be repaid until the homeowner moves, sells their home, or dies. Reverse mortgages may be a good option for seniors when selling the home may not be profitable or there is a need for supplemental income. While reverse mortgages are beneficial for some, there are some downsides for many, including significant expenses. Here are the basics of reverse mortgages.
What Is A Reverse Mortgage?In a reverse mortgage or home-equity conversion mortgage (HECM), which is the most popular type of reverse mortgage, the borrower exchanges equity in their home for money from a bank or other lender. The homeowner is still required to pay property taxes and homeowners’ insurance premiums on the property. The lender’s payments to the borrower may be in the form of a lump sum, monthly payments, a line of credit the borrower can draw on as needed, or a combination of these options. The loan does not have to be repaid until the borrower moves, sells the home, or dies. After any of these occurrences, the lender can accelerate the loan and the loan must then be repaid with interest and fees; otherwise the lender can foreclose on the property.
How HECM Reverse Mortgages WorkThe Federal Housing Administration (FHA) created HECMs. A HECM is the most common reverse mortgage obtained. With a HECM reverse mortgage, a borrower typically receives payments from the lender in the form of monthly payments or a line of credit. Borrowers may also receive a lump sum payment or a combination of these types of payments; these payments become the loan. The principal balance of the loan grows each time the lender sends a payment until the borrower reaches the maximum loan amount. The maximum loan amount is determined based on the equity the homeowner has in house.
RequirementsThe FHA only offers reverse mortgages to homeowners who are 62 years of age or older; own the property outright, or have paid-down a considerable amount; occupy the property as their principal residence; are not delinquent on any federal debt; have the financial resources to pay ongoing property charges including taxes and insurance; and participate in a consumer information session. In addition to borrower requirements, the FHA also imposes property requirements. To be eligible for a reverse mortgage, the property must be a single family home or 2-4 unit home with one unit occupied by the borrower, a HUD-approved condominium project, or a manufactured home that meets FHA requirements.
Pros and ConsReverse mortgages have certain advantages for some seniors. Borrowers are able to live for the rest of their lives in their home with no monthly mortgage payments. Additionally, borrowers continue to own their home and retain the ability to sell or transfer their property just the same as they would with any other home loan. Reverse mortgage proceeds are tax free, and borrowers can use the money for any purpose they choose, such as, medical expenses, travel, or additional spending money.
While there are benefits to reverse mortgages, they also have significant downside. Predators see seniors as “easy targets” and there are dozens of reverse mortgage scams out there. Reverse mortgages are expensive due to closing costs, interest, servicing fees, mortgage insurance, and other fees. A reverse mortgage could also affect a borrower’s eligibility for Medicaid by increasing their monthly income. Also, if the borrower has been out of the home for more than two months due to a medical issue or vacates the home for any other reason, the lender can accelerate the loan. Additionally, if the borrower fails to pay property taxes or homeowners insurance, fails to keep the property in reasonable shape, or breaches any of the other mortgage requirements, he or she will have to pay back the loan in full or the lender can foreclose on the property. Notably, reverse mortgage lenders have a reputation for foreclosing on elderly homeowners for relatively minor mortgage violations.
Protect YourselfIf you are considering obtaining a reverse mortgage, ensure you know the risks and beware of reverse mortgage scams. Consult an elder law lawyer who will represent your interests and help you choose the best options for your specific circumstances. Find the perfect lawyer by quickly posting a short summary of your legal needs on Legal Services Link, and let lawyers come to you!
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