If you’re a senior homeowner in search of cash to supplement social security, pay off medical bills or credit card debt, or if you are considering home improvements or you want to buy a car, you may not have to look any farther than your front door.
Qualified borrowers can tap into the value of their homes using a reverse mortgage to get that money now.
What is a reverse mortgage?
A reverse mortgage is different than a traditional home equity loan or second mortgage.
According to the U.S. Department of Housing and Urban Development (HUD), “with a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments.” But with a reverse mortgage, you won’t have to make monthly payments. Repayment of a reverse mortgage is not required until you no longer use your home as your principal residence, according to HUD.
With a reverse mortgage, you can borrow against the equity in your home that you have built through years of mortgage payments (whether or not you've paid off your home entirely).The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.
Can I qualify for a reverse mortgage?
You’ll have to be over the age of 62 and own your home outright or have a relatively low mortgage balance on the home you’d like to get a reverse mortgage on. You also have to be using the home as your primary residence, meaning it’s your official address and it’s in the area where you pay your taxes and vote, according to Peter Bell, president of the National Reverse Mortgage Lenders Association. And you can’t use the home or unit that is your primary residence at any time as an investment property from which you receive rental income, he says.
Your credit score and income aren’t used in determining your eligibility, but you’ll need to receive credit counseling before you receive a reverse mortgage. You can find a credit counselor for free or low-cost advice through the HUD or the National Foundation for Credit Counseling.
What kinds of homes are eligible?
Your home must be a single family home, a one-to four-unit home, a HUD-approved condominium or a manufactured home that meets HUD's Federal Housing Authority (FHA) requirements.
Who Offers Reverse Mortgages?
HUD's FHA has its own program, the Home Equity Conversion Mortgage (HECM) program. Most reverse mortgages, about 90% according to the American Association of Retired Persons (AARP) are made through the FHA, but some are available through proprietary lenders, such as Bank of America (Stock Quote: BAC), MetLife (Stock Quote: MET), Senior Lending Network and other national and community banks.
How much money can I get with a reverse mortgage?
Factors that determine the amount of cash available to you via a reverse mortgage include your age, the current interest rate and the appraised value of your home.
Keep in mind there are fees. They include the cost of appraising your home, a loan origination fee of 1% to 2% of your initial loan amount and a mortgage insurance premium (in case your loan servicer goes out of business). These costs are deducted from your available loan proceeds, and you may have to pay a monthly fee to your loan servicer.
For FHA loans, until late last year, reverse mortgage loans were limited to between $200,000 and $300,000 depending on where you live, says Bell. “Legislation last summer raised the limit to $417,000, and the recent stimulus bill raised it to $625,500,” Bell notes. With proprietary lenders, you can get a reverse mortgage if your home is worth more than this amount, but not an FHA-insured loan.
How do I receive loan payments?
There are several ways you can choose to receive your loan payments.
• Tenure: Fixed monthly payments for as long as you stay in your home.
• Term: Fixed monthly payments for a specific period of time.
• Line of credit: If you want to decide when and how much money to take out when you need it.
• Modified tenure: A credit line and tenure payment combination.
• Modified term: A credit line and monthly payments for a fixed period of time.
What happens to my house if I outlive my loan… or it outlives me?
When you die or move, your house is sold, the money made on the sale pays off your loan, and any balance goes to your estate.
Because reverse mortgages are considered “non-recourse” loans, the homeowner can never owe more than the home is actually worth – even if the loan amount is more than the estimated value of the home. And, according to Bell, you can’t be forced out of your home at any time.
Interested in more information?
To find a list of reverse mortgage lenders in your area, visit the HUD web site.
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