A reverse mortgage can be a great way for a homeowners to take advantage of accumulated home equity to cancel their mortgage payments, create a monthly income stream, provide funds for home improvement and other needs, or a combination of all three.
A reverse mortgage is different than a traditional mortgage.
With a traditional mortgage you make monthly mortgage payments, but with a reverse mortgage any funds you owe, through receipt of monthly payments or of periodic lump sum payments, accumulate over time and are then repaid when you sell your home.
Another difference between traditional mortgages and reverse mortgages is that you can never owe more than the value of your home. In the unlikely event that your home is worth less than your loan balance at the time the home is sold, any shortfall is forgiven with no adverse credit profile consequences.
Like traditional mortgages, you retain full ownership of your home. When you sell your home the reverse mortgage is paid off and you retain the remaining equity.
A reverse mortgage is a loan designed to allow homeowners age 62 and older to draw upon the equity in their homes either by a lump sum distribution(s) or by monthly instalments, providing income to supplement other income, such as Social Security and pension benefits. Any amounts not used remain as a line of credit that can be used in the future.
The reason this type of mortgage is called a “reverse mortgage” is because funds from accumulated home equity flow outward to the homeowner instead of flowing from the homeowner to the lender. Eventually the money paid to the homeowner is repaid with interest, however it generally doesn’t become due until the homeowner sells the home.
Most reverse mortgages are Federal Housing Administration insured Home Equity Conversion Mortgages (HECM). The FHA guarantee is important because it ensures that your equity distributions will take place no matter what institution owns or services your loan in the future. The FHA charges up front and monthly mortgage insurance premiums to maintain a reserve fund for these distribution guarantees. The reserve fund is designed to pay any funds that would normally come from the institution that owns the loan so that this burden will not fall on the US taxpayer.
There are many reasons why people get reverse mortgages. Here are some of the most common:
If you own your home and are at least 62 years of age you are eligible for a reverse mortgage. There are some limitations on eligible properties:
FHA-insured reverse mortgages are highly regulated financial products: