Reverse
Mortgage
A
reverse mortgage is a special type of loan made to older homeowners to enable
them to convert the equity in their home to cash to finance living expenses, home
improvements, in-home health care, or other needs.
With
a reverse mortgage, the payment stream is "reversed." That is, payments are made
by the lender to the borrower, rather than monthly repayments by the borrower
to the lender, as occurs with a regular home purchase mortgage.
A
reverse mortgage is a sophisticated financial planning tool that enables seniors
to stay in their home -- or "age in place" -- and maintain or improve their standard
of living without taking on a monthly mortgage payment. The process of obtaining
a reverse mortgage involves a number of different steps.
The
first, most widely available reverse mortgage in the United States was the federally-insured
Home Equity Conversion Mortgage (HECM), which was authorized in 1987.
A
reverse mortgage is different from a home equity loan or line of credit, which
many banks and thrifts offer. With a home equity loan or line of credit, an applicant
must meet certain income and credit requirements, begin monthly repayments immediately,
and the home can have an existing first mortgage on it. In addition, there is
no restriction on the age of borrowers.
In
general, reverse mortgages are limited to borrowers 62 years or older who own
their home free and clear of debt or nearly so, and the home is free of tax liens.
Borrowers
usually have a choice of receiving the proceeds from a reverse mortgage in the
form of a lump-sum payment, fixed monthly payments for life, or line of credit.
Some types of reverse mortgages also allow fixed monthly payments for a finite
time period, or a combination of monthly payments and line of credit. The interest
rate charged on a reverse mortgage is usually an adjustable rate that changes
monthly or yearly. However, the size of monthly payments received by the senior
doesn't change.
Some
reverse mortgage products also involve the purchase of an annuity that can assure
continued monthly income to the senior homeowner even after they sell the home.
The
size of reverse mortgage that a senior homeowner can receive depends on the type
of reverse mortgage, the borrower's age and current interest rates, and the home's
property value. The older the applicant is, the larger the monthly payments or
line of credit. This is because of the use of projected life expectancies in determining
the size of reverse mortgages.
Seniors
do not have to meet income or credit requirements to qualify for a reverse mortgage.
Unlike
a home purchase mortgage or home equity loan, a reverse mortgage doesn't require
monthly repayments by the borrower to the lender. A reverse mortgage isn't repayable
until the borrower no longer occupies the home as his or her principal residence.
This
can occur if the sole remaining borrower dies, the borrower sells the home, or
the borrower moves out of the home, say, to a nursing home.
The
repayment obligation for a reverse mortgage is equal to the principal balance
of the loan, plus accrued interest, plus any finance charges paid for through
the mortgage. This repayment obligation, however, can't exceed the value of the
home.
The
loan may be repaid by the borrower or by the borrower's family or estate, with
or without a sale of the home. If the home is sold and the sale proceeds exceed
the repayment obligation, the excess funds go to the borrower or borrower's estate.
If the sales proceeds are less than the amount owed, the shortfall is usually
covered by insurance or some other party and is not the responsibility of the
borrower or borrower's estate. In general, the repayment obligation of the borrower
or borrower's estate can't exceed the value of the property.
In
general, a borrower can't be forced to sell their home to repay a reverse mortgage
as long as they occupy the home, even if the total of the monthly payments to
the borrower exceeds the value of the home.