Reverse Mortgage Is a Group

Reverse Mortgage is a group of loans, similar to a home equity lone that is designed for people above the retirement age (62+) that have a clear mortgage or a very low remaining balance on that mortgage and live in the home. The loan is structured like a home equity loan, excluding that you can never owe more than your home is worth, in many cases the loan is not paid back but is paid back with the equity of the home when the home sells upon evacuation by the owner and there is a fixed cap depending upon value and area which excludes those with very valuable homes from borrowing much more than those with average valued homes. The office of Housing and Urban Development has a program that authorizes the use of reverse mortgages otherwise known as Home Equity Conversion Mortgages,(HECM) which allow non-traditional borrowers, (those who are generally thought of as high risk for new mortgage loans) the non-working elderly to borrow against the equity in their home. The loan type is for elderly as, "people reach their retirement years house rich and cash poor."

The borrower can also choose one of four loan payment plans; a tenure payment plan where the loan pays out an equal monthly payment to borrower for as long as one borrower continues to live in the home, a term where the borrower(s) receive an equal monthly payment for a fixed number of months, a line of credit type plan where the borrower can take unscheduled payments up to the amount of the credit limit, a modified tenure a combination where unscheduled as well as monthly payment are made as long as a borrower remains in the home, and last a modified term where unscheduled payments as well as monthly payment are made for a fixed amount of months. Finally the loan payment plan can be restructured for a nominal fee of $20 if circumstances change and the borrower needs lump sum or larger monthly payments on a term plan.

Qualifications for a reverse mortgage include being 62 or older, own the property, the property is the primary residence, lastly the individual must attend a counseling session with an approved HECM councilor. The home owner must also have a clear mortgage or a low pay off mortgage on the property. The amount paid is based on the age of the youngest borrower, the value of the home based on the lesser of two amounts, appraised value and FHA insurance cap, and the current interest rate. In general according to HUD:

the more valuable your home is, the older you are, the lower the interest, the more you can borrow. For example, based on a loan with an interest rates of approximately 9%, and a home qualifying for $100,000, a 65-year-old could borrow up to 22% of the home's value; a 75-year-old could borrow up to 41% of the home's value; and, an 85-year-old could borrow up to 58% of the home's value. The percentages do not include closing costs because these charges can vary.

The qualifying property is limited only to the fact that it is the primary residence and either a single family dwelling or up to a four family dwelling where one of the units is the primary residence of the borrower or couple. Other qualifying properties are HUD approved condominiums, mobile homes on leased land all of which must meet the FHA flood and insurance requirements.

There are no income or credit qualifications for the borrower. There is no repayment needed as long as the home remains the primary residence of the individual(s) and closing costs of the loan can be financed within the mortgage.

HUD warns those who are looking into reverse mortgages to avoid look-alikes and those who charge for services and information that HUD provides free, as there has been a rash of such lenders seeking to lend to the elderly and seeking to cash in not only now but in the future, while HUD provides a service that is insured (base on a lump sum payment at the beginning of all loans that ensures that if the equity in a home is less that expected the loan will be covered by the insurance.) This insurance is paid at a fixed 2% of the loan value or can be financed in the mortgage at 2.5% of the mortgage.

Other look-alike programs ask that the loan be paid back during the life of the borrower, and this is entirely unlike the traditional HECM program, designed to allow the elderly an additional source of income during their lifetime.

The pluses of reverse mortgage is that the individuals may remain in their home, living much like they have in the past but be able to support themselves better and maintain the home more easily. Many individuals in retirement that outlive their savings and/or pensions tend to feel trapped to sell the only asset they have, a low or no mortgage home as a result of limited resources for medical care and increased cost of living. The Reverse mortgage program if done right can greatly help such individuals, while they are living stay in their home for as long as possible instead of selling it paying a greater amount that they would in their home to live. Individuals can live in familiar surroundings and reap the benefits of the low cost mortgage they have already paid off. There are actually a great many benefits to such loans, not the least of which being the individuals rarely if ever qualify for additional mortgages, (2nd mortgages) as younger people would if in the same predicament or home equity loans to help maintain the property to a livable and potentially sellable state.

The benefits may outweigh the costs but there are downsides of the loans, which will be discussed next.

One of the serious downsides of reverse mortgages is that the loan will likely not be resolved unless the home is sold, and this depends a great deal on the length of the loan, and the amount that was paid after the loan was signed, either in lump sum or payments. What this means for those who choose to sign such loans is an inheritance concern, where unless individuals or multiple family members are capable of securing a loan or buying the loan outright upon the death or evacuation of the elderly borrower(s) from the home will need to be sold to cover the debt and inheritance is paid only after such debts have been covered, if any amount remains.