A reverse mortgage is a kind of equity release or lifetime mortgage available in the United States under a Federal program administered by HUD. It enables homeowners who are eligible to access a portion of their equity. For senior citizens above 62 years, lenders offer instant cash without any monthly payments. This allows the pensioners with a home, but no cash, to get easy financing to meet their daily needs or for any other purposes. This allows them to convert their equity tied up in their home into cash.
What are the advantages and risks of this type of mortgage?
This mortgage allows you to reside in your own home. You get monthly income which will help you maintain a comfortable standard of living. The money generated is non-taxable since it is a loan and not income. In the short term, the advantages seem to be very attractive but in the long term the risks far outweigh the benefits. Unlike a conventional mortgage, in reverse mortgages the lender pays you money based on the equity in the home. But in return the lender imposes strict conditions on you. You get the mortgage only on the primary residence.
So if there is another home where you do not reside, you will not get the mortgage. If you die, sell home or change your main residence, you need to pay back the loan along with the accrued interest. To do that, you will have to sell off the home. Also, this mortgage can erode the accumulated equity in the house rapidly. Besides, if you want to leave the house as an inheritance, you will not be able to do so.
How much mortgage will I get? You can get any amount between 10 to 40% of the value of home obtained after appraisal. It is directly dependent on your age, the present rate of interest and the value of the property. You can get free online reverse mortgage quotes through the internet. There are lots of reverse mortgage websites, which would be useful to you.
The homeowners are able to draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof. Regarding a conventional mortgage, the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal incorporated in the payment, the property is released from the mortgage when the mortgage has been paid in full.
However,in a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit, increases the available credit by the same amount. Interest that accrues is added to the mortgage balance.
Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage. If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home in some areas. However most lenders do not appreciate taking a second or third lien position behind a reverse mortgage for the simple reason that its balance increases with time.
One hardly finds reverse mortgages with subordinate liens behind them as a result. A reverse mortgage may be refinanced if enough equity is present in the home, and in some cases may qualify for a streamline refinance if the interest rate is reduced. A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.
It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. If either taxes or insurance lapse, it could result in a default on the reverse mortgage. Once the reverse mortgage is established, there are no restrictions on how the funds are used. In addition to the tenure monthly payments, the borrower has the option of moving the entire amount of money into investments, or they can simply take the money and spend it as they wish.