A reverse mortgage used to be considered a last resort option for the so called, “cash strapped” seniors who needed to tap into home equity in order to get financial help during retirement. However, with home prices across the country declining at astonishing rates, and financial assets evaporating in the worst economic downturn since the Great Depression, more and more retirees are turning to a reverse mortgage as a necessary remedy to the financial crisis. This article will cover general information so that you will have a basic idea of what a reverse mortgage is and what the qualifications are in order to obtain one.
As you might be aware, reverse mortgages are becoming more mainstream by the day. More lenders than ever before, are offering this type of loan and each year the demand grows. It’s not just the economic crisis that has fostered this, but it’s also the rise in life expectancies, the rise in health care costs for seniors, and the overall increased costs of daily essentials.
SO WHAT EXACTLY IS A REVERSE MORTGAGE?
A reverse mortgage is a unique type of home equity loan that can provide lifetime Tax-Free income to seniors 62 or older. Senior homeowners that have accumulated large amounts of equity over many years of homeownership, now have a way to tap into this asset through a reverse mortgage and never make another monthly mortgage payment as long as they live in the home. Before this financial tool was available the only way to tap into this asset was to sell the home. Most people do not find this an acceptable option at this stage of life.
HOW DOES A REVERSE MORTGAGE WORK?
A Reverse mortgage works in exactly the opposite way that a “forward” or regular mortgage loan works. American Association for Retired Persons suggests, that one way to think about this mortgage is to visualize it as a “rising debt – falling equity” loan. This is very different from the purchase mortgage you used years ago when you first bought your home. That loan was considered a “rising equity – falling debt” loan. Although it was comforting to know you were building up equity over the years and working toward becoming mortgage free, now that you are there, you might be feeling a bit house rich and cash poor. Yes, the home is paid off or nearly so, but you may be having difficulty making ends meet from a cash flow standpoint. Your largest asset might very well be your home. But the only way you can access the cash, other than through a reverse mortgage, is to sell your home. Consequently, now might be the perfect time to consider reversing tapping into your home equity in order to have the financial freedom you deserve.
With a reverse mortgage, the lender pays the homeowner tax-free disbursements based on the amount of equity in the home, the interest rate and the age of the owners. The senior is not required to give up title, sell the home, or make monthly mortgage payments. The payment stream is “reversed” and the lender now makes payments to the homeowner as long as the senior continues living in the home. There are no income, medical or credit requirements to qualify for this type of home loan. The money can be used for any purpose.A Reverse Mortgage is a safe way for seniors to access home equity without making monthly mortgage payments. The HECM Reverse Mortgage Loan, endorsed by HUD and insured by FHA is the most popular reverse mortgage offered today. The purpose of this kind of loan is to allow you to receive cash from your home, without the obligation on your part to make monthly mortgage payments. The true beauty of this loan is that it does not require any repayment for as long as you live in your home.
HOW MUCH MONEY CAN YOU GET?
The Loan Amount is Determined By:
The Value Of The Home
The Age of The Youngest Borrower
The Current Interest Rate
Some people are under the misunderstanding that in order to get a reverse mortgage all they need is to own a home, regardless of how much is still owed on the existing mortgage. They think of this loan as a typical conventional refinance transaction where the loan amount can be very close to the value of the home. However, this is not the case with a this type of mortgage. Equity is the key component in determining a borrower’s eligibility for a reverse mortgage.
To be eligible, there must be significant equity in the property. Minimally, the amount of equity should be in the area of 50 to 60% of the market value, depending on the ages of the homeowners and the current interest rates. The reason the equity requirement is so high is because the equity must last the expected life-time of the youngest borrower. For example if the youngest homeowner has just turned 62 (which is the minimum age requirement to be eligible) the money being paid out to the seniors from their accumulated equity, could potentially have to last 30+ years.
All owners on the title to the home must be at least 62 years old There should be a large amount of equity in the home The home must be the primary residence for all borrowers The home must be: Single Family, Condo, Town-home, 2-4 owner occupied home or manufactured on a permanent foundation and built after June of 1976. Criteria that are NOT considered are:
Although, not right for everyone, this mortgage can be the perfect answer for seniors who wish to remain in their home but are finding it a challenge to make their monthly payments and meet other financial obligations.
It is important to collect as much reverse mortgage information as possible before you decide whether this kind of loan is the right solution for you. Reverse mortgage consumer guides offer some of the best reverse mortgage information available today. Some great sources are: HUD and the National Council on Aging (NCOA.)