Learn about the reverse mortgage option

Learn about the reverse mortgage option

The term reverse mortgage is everywhere these days. It often appears in advertisements or pops up in Internet searches. But you may not understand what exactly it is.

In short, it’s a unique home loan that allows homeowners to convert some of their home equity into cash. That equity that a homeowner has built up over the years of making payments on their home can now be paid back to them in installments. In a typical mortgage situation, the borrower pays the lender, and each payment reduces the amount owed and builds the borrower’s equity in the home. With a reverse mortgage, the borrower receives payments from the lender, and each payment increases the loan balance and decreases the amount of equity.

Who gives these loans?

Most of these loans are issued by the Federal Housing Administration (FHA) and are known as home equity conversion mortgages or HECMs. A HECM is guaranteed by the FHA, so the borrower doesn’t have to worry about not getting payments from their lender.

Who qualifies for these loans?

To qualify for this type of loan, homeowners must be age 62 or older and have significant equity in their home. Also, to get a HECM, homeowners must own their homes outright or the balance they owe on their home must be low enough that it can be paid off with the proceeds of the reverse loan at closing. In addition, the borrower must live in the home and be able to pay for recurring charges associated with the property, including taxes and insurance. Finally, before getting the loan, borrowers should get information from a HECM counselor. The applicant’s home must be a single-family home, a HUD-approved condominium or manufactured home that meets FHA requirements, or a two- to four-unit dwelling if the borrower lives in one of the units.

How much can you borrow?

The amount a homeowner can borrow with a reverse mortgage varies depending on their age, the value of the home, and the interest rate on the loan. In most cases, older homeowners are able to borrow more money, and the more a home is worth or the more equity the owner has in it, the more the owner can borrow. Lower interest rates on loans also increase the owner’s ability to borrow.

How do I get my funds?

With a HECM, borrowers have several choices for how to receive their payments. Borrowers can choose to receive a lump sum payment at loan closing, or the borrower can take out a line of credit. This line of credit can be used as the borrower chooses and grows over time. The borrower can also choose to receive payments in the form of a monthly annuity. A monthly tenure annuity is a monthly payment that the borrower receives for the entire time they live in the home. A fixed monthly annuity is a monthly payment that the borrower receives for a period of time that he chooses. Borrowers can also choose to combine these options, such as choosing to receive a monthly annuity but also take some cash at closing. By paying a small fee, borrowers can also switch from one option to another.

A reverse mortgage can be a useful source of income for seniors. By researching the pros and cons of this type of loan, homeowners can determine if it is right for their financial situation.

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