Your home equity loan or home equity line of credit could dash your dreams of reducing your monthly mortgage payment through a refinance. Blame a complicated mortgage-lending quirk known...
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By: Kirk Haverkamp
Updated and reviewed: Jul 5, 2013
Financial publications report that our nation is currently in the worst economic climate since the Great Depression. Many have encountered financial difficulties. Senior adults are no exception. Many have experienced a serious loss of income and drop in their standard of living. For some seniors, the availability of reverse mortgages has been the lifeline that has kept them financially afloat. These loans allow them to convert a portion of the equity they have in their homes into cash.
Things a Senior Adult Must Know Before Seeking a Reverse Mortgage Loan
What is a reverse mortgage? It is a special kind of home loan that requires a person be age 62 or older in order to qualify. Unlike other loans, this type does not have to be repaid as long as the home is the borrower’s principal residence.
The borrower must own the property outright or have only a small mortgage. He must not be delinquent on a federal debt. There are no credit or income requirements for the borrower.
There are reverse mortgage lenders who specialize in this type of loan. They are members of the National Reverse Mortgage Lenders Association and should be licensed to make this type of loan in the borrower’s state.
There are two types of reverse mortgage loans. Privately sponsored ones may bring a higher loan amount and lower costs. There is also a type of Federal Housing Administration (FHA) reverse mortgage. These Home Equity Conversion Mortgages (HECMs) typically have a lower interest rate and are insured by the federal government. Another benefit is the borrower will not owe more than the value of the loan, even if the loan exceeds the home’s value.
A strength of reverse mortgage loans is that potential borrowers must attend an approved consumer information counseling session led by well-experienced pros who help them understand and work through the process.
Several varieties of homes qualify for reverse mortgages: single-family homes, condominiums, townhouses, 2 – 4 unit properties with one unit occupied by the owner/borrower and manufactured homes that meet FHA requirements. Farm homes and most cooperative housing type homes are ineligible.
Questions of Immediate Concern
“How much money can I get?” is one of the first questions people ask. There is no hard-and-fast answer. The amount for which a borrower qualifies depends upon his age (or the age of the younger spouse, when a couple applies), the current interest rate and the appraised home value. HECM reverse mortgage loans have a maximum amount available based on the area in which the borrower lives. Generally speaking, the older the borrower and the more valuable the home, the larger the loan can be. There are reverse mortgage calculators available on the Internet that will estimate how large the loan can be. Any member of the National Reverse Mortgage Lenders Association can also give an estimate.
“For what can I use the money from this type of loan?” Basically, it can be used for anything. These loans are often used for remodeling, to pay down debt, to pay off an existing conventional mortgage, for medical care or simply to enhance the standard of living.
“How can a person receive the funds from a reverse mortgage loan?” There are five choices. A borrower must choose the option that benefits him most. He can change his payment option later for a fee of $20.
- Term: Equal monthly payments for the number of months selected by the borrower.
- Tenure: Equal monthly payments for as long as the borrower lives and occupies the property.
- Line of Credit: Unscheduled payments at the times and in the amounts chosen by the borrower until the line of credit is exhausted.
- Modified Tenure: A combination of line of credit and monthly payments for as long as the borrower lives in his home.
- Modified Term: A combination of line of credit and monthly payments for a pre-selected number of months.
A concern of potential reverse mortgage loan customers is, “Can the lender take my home if I live longer than anticipated?” The answer is “No, and no payment needs to be made as long as you live in the house, keep the taxes and insurance paid and maintain the house.”
“How are these loans repaid?” Repayment is made when the borrower dies or no longer uses the home as his principal residence. At that time, there are two choices. The borrower’s heirs can sell the house and repay the loan from the proceeds. Funds from the sale in excess of the loan amount become part of the borrower’s estate. Otherwise, the heirs may choose to repay the loan and receive a free and clear title to the property.
“What are the costs and fees of an HECM?” Most of the costs of a government HECM can be paid by financing them and having them paid from the loan amount, so they will not have to be paid as out-of-pocket expenses. Fees include an origination fee, closing costs, interest, servicing fees and a mortgage insurance premium.
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