Reverse mortgages are taking America by storm. Here are answers to the top six questions about the lending instrument that can help seniors weather the storms of financial woe by tapping into their home equity.
1. What exactly is a reverse mortgage?
A reverse mortgage, also known as a home equity conversion mortgage (HECM), allows people over the age of 62 to tap into the accumulated equity in their homes. It's very different from a traditional mortgage, where the bank gives you money that you immediately begin to pay back. With a HECM, the bank still gives you cash, but you don't need to pay it back until you sell your home or die.
2. Does my home qualify?
If the property that you own is your primary residence, and is a single-family home, it will qualify for a reverse mortgage. It's also acceptable if it's a one to four unit home, as long as you occupy one of the units. If you live in a condominium, and it's HUD-approved, it also meets the guidelines.
3. Once I take a HECM, who owns my home?
You'll always be the owner of your property as long as you live in your home. However, you must make sure to keep taxes current, and keep the property in good repair.
4. What happens to my home when I pass away?
Once you die, your estate will be expected to pay back the loan. If your children inherit your property, they can choose to sell it, pay back the bank from the proceeds, and keep the leftover money for themselves. They can also choose to pay off the balance from other monies, and keep the home in the family.
5. How much cash can I receive?
You'll be eligible to borrow a specified amount based on your age, the prevailing interest rate at the time you apply for the loan, and the appraised value of your home, as long as it's less than the FHA mortgage limits in your vicinity. The older you are, the more money will be available to you.
6. How will I receive my cash?
There are five ways to receive HECM funds. The first way is similar to an annuity, where you receive equal monthly payments as long as you remain in your home. The second option is to receive equal monthly payments for a term that you and the bank agree to. Another way, which offers the most flexibility, is to have a line of credit, which you can draw from on an as-needed basis.
The last two ways are combinations of the first three. You can select a line of credit along with payments each month, for as long as you stay in your home. Or you can opt for a line of credit and payments each month for a designated period of time, which you select.
A reverse mortgage can be a real gift if you're house rich and cash poor, and struggling for money. By gaining a deeper understanding, you can design one to meet your specific needs.