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Reverse Mortgage

What is a reverse mortgage and can a reverse mortgage help you?

A reverse mortgage is a loan that is taken out on a home to provide a cash flow to the owner, usually to supplement pension payments and/or Social Security income. The loan is based on a percentage of the equity in the home and the money can be used to help pay living expenses, medical bills, make home improvements, or it can be used in any other way the borrower deems necessary.

Any existing mortgages that are already on the property must be paid off. After paying off other loans on the home, the money you get can be put towards the things you need or want. A reverse mortgage loan turns the equity in your home into a tax-free income. The money is yours and so is the decision as to how you use it.

With a reverse mortgage, a homeowner can get the funds in multiple payments or in one lump sum and the loan does not have to be repaid until the home is sold, the owner dies, or is put in an elder care facility. In essence, a reverse mortgage is paid with the homeowner's equity in which the principal and interest are paid in a manner similar to that of an annuity.

To qualify, a borrower must be at least 62 years old. There are no credit or minimum income requirements, but other conditions must be met that makes it imperative that the borrower know that he or she can qualify for the program before investing a lot of time and money into the process.

If the property is in bankruptcy, the qualifying process for the reverse mortgage may take longer. The home can also never be foreclosed as long as real estate taxes are kept current. Even if the borrower in a reverse mortgage outlives the loan, the home will never be taken and the loan not paid off until the home is sold or the borrower dies.

Single family homes, town homes, and small apartments may qualify for reverse mortgages and certain types of dwellings, like mobile homes, fall into certain categories with special requirements. The home must be occupied by the borrower who retains the title to the property.

The amount of money made available to the borrower depends on the age of the borrower, the appraised value, whether there are already liens on the property, if there are safety or health related repairs that need to be made, the location of the property and how the borrower decides to take payments. The borrower makes no payments and the interest is added to the lien on the property.

The borrower can get the money from a reverse mortgage in either one of three ways:

  • (1) Lump sum: All cash immediately in one payout
  • (2) Line of credit: Maximizes the money available by giving the borrower the option of using the funds only when needed.
  • (3) Monthly payments: Paid for the rest of borrower's life or until the equity funds are all used up.

The borrower must partake in financial counseling before being approved for a reverse mortgage. The counseling source must be approved by the Department of Housing and Urban Development (HUD). The counseling is to insure that the borrower and the borrower's family completely understand what a reverse mortgage is, how it is obtained on the property, how the property and the equity are affected and what the short term and long term affects on the borrower will be.

If the property increases in value, the borrower may apply for a second or third reverse mortgage but the reverse mortgage may be the only type of mortgage on the property. The borrower must also insure that the taxes and insurance are current at all times. If not, a default could result on the reverse mortgage.

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