Reverse Mortgages are becoming increasingly more popular in the United States. The U.S. Department of Housing and Urban Development (HUD) created one of the first reverse mortgage programs. Their reverse mortgage is a federally-insured private loan, and it's a safe plan that can give older Americans greater financial security. Many seniors use it to supplement their fixed income, meet unexpected medical expenses, make home improvements, etc. Because your home is probably your largest single investment, it's not a bad idea to know more about reverse mortgages and decide if one is right for you.
A reverse mortgage is a home loan that allows a homeowner to convert a portion of their equity into cash. The equity built after years of paying on a mortgage can now be paid back to you. But unlike a traditional home equity loan or line of credit, no repayment is required until the borrower no longer uses the home as their primary residence.
Qualifying is actually quite simple. To qualify for a HUD reverse mortgage, you must be a homeowner 62 years of age or older, either own your home outright or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse mortgage and you must live in the home. You are further required to receive consumer information from a HUD approved counseling source prior to obtaining the loan.
Your home must be a single family dwelling or a two-to-four unit property that you own and occupy. Townhouses, detached homes, units in condominiums and some manufactured homes are eligible. Condominiums must be FHA approved but it is also possible for individual condominium units to qualify under the Spot Loan program.
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income in order to qualify for the loan and you are required to make monthly mortgage payments. A reverse mortgage is different in that it pays you, and is available regardless of your current income level. The amount you can borrow is dependent upon your age, the current interest rate, and the appraised value of your home. In general, the more your home is worth and the older you are, the lower the interest rate is and the more you can borrow. You don't make payments because the loan is not due as long as the house is your primary residence. Like any other home loan, you are still required to pay real estate taxes, utilities and maintenance but you cannot be foreclosed on because you missed your mortgage payment.
You do not need to repay the loan as long as one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than your home's value and when you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees to the lender. The remaining equity in your home, if any, belongs to you or your estate. None of your other assets will be affected by HUD's reverse mortgage loan and this debt will never be passed along to the estate or your heirs.
You have five different options for receiving payment. The Tenure option allows you to take equal monthly payments as long as at least one borrower continues to occupy the property as a principal residence. The Term option allows you to take equal monthly payments for a fixed period. The Line of Credit option allows for unscheduled payments or installments whenever the borrower chooses until the line of credit is exhausted. The Modified Tenure option allows for a combination of a line of credit along with monthly payments for as long as the borrower remains in the home and the Modified Term option allows for a combination of a line of credit with monthly payments for a fixed period.
For homeowners aged 62 and older, reverse mortgages provide a safe way to tap into your home’s equity to pay for what you want or need without giving up your home or your quality of life.