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An Introduction to Reverse Mortgages

Posted by  on Apr 16, 2009
 
Because life situations are changing, it's no wonder that mortgages are changing right along with them. For older homeowners, a reverse mortgage is now the new way to get into a home without the traditional rules of home buying. What this mortgage does is releases the owner from having to pay for the home until the home is sold, the owner dies, or the owner leaves the home to go into a nursing care setting. What happens is that the equity in the home is released via the mortgage for seniors over 62 years of age.

Unlike a traditional mortgage, the reverse mortgage is where the homeowner doesn't make any payments, thus adding to the lien on the house and the property. If the homeowner then takes out equity on the home, they will add those costs to the home's balance to be paid.

While this sounds almost too easy to obtain, the reverse mortgage does have several stipulations that are required in the transaction. First of all, the borrower needs to be at least 62 years of age. However, there are no income requirements or credit checks for this loan — but a bankruptcy might slow the process. If the homeowner already has a mortgage, they will need to pay off the remaining sum with the reverse mortgage.

There are a number of ways that the amount of money borrowed will be determined. Depending on the age of the borrower, the Fannie Mae or Federal Housing Administration will determine the amount of money that the borrower can access. But age is not the only determining factor in this case — so is location.

The money is dispersed sometimes in a lump sum or in monthly payments to the borrower. This amount will be affected by other sources of income, like social security, especially if you are taking in more than you need in accordance with social security's standards. But the fluidity of these funds can help to plan for the financial future. By setting aside some of the funds, the borrower will be able to prepare for any property taxes or insurance policies on the home itself. This is especially important to do because defaulting on any of these accounts can cause the reverse mortgage to also be defaulted.

The main concern with a reverse mortgage is that it can cost a lot more for the borrower to obtain than a traditional loan. If you don't have a lot of money for these costs, it may not be the best choice, though you are able to put those costs into the mortgage itself. However, this is only going to increase the balance and thus the costs for anyone that might have to continue paying after you leave your home.

Just as with typical mortgages, interest rates will vary and change in accordance with the market as well as the lender's policies. But there are some reverse mortgages that are coming with fixed interest rates, so that might be helpful for avoiding the fluctuations.

When the owner of the home dies, the home's sale proceeds will be used to pay off the remaining debt. But if this isn't something the owner's heirs want, they can also choose to refinance the home to keep the home in their possession or take over the agreement.

The main concern with reverse mortgages is that you're not going to be able to necessarily keep the home in your family at the end of your life, which is problematic in some situations. Since you're never really getting to pay off the home, you are saving money, but you will also be able to enjoy your later years without the burden of a payment.

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