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Understanding Reverse Mortgages

Posted by  on Aug 08, 2010
 

Recent legislative proposals have drawn attention to reverse mortgages, which FHA calls home equity conversion loans (HECM). As with its traditional home loan programs, FHA insures mortgage lenders against losses resulting from defaulted HECM loans. Here are a few details about who's eligible for a reverse mortgage and how these loans work.

Reverse Mortgages: Eligibility

  • Applicants must be 62 or older
  • Homeowners must occupy the home being mortgaged as their principle residence
  • Borrowers must complete a revere mortgage educational program prior to applying.
  • Refinance mortgages: Any existing mortgages must be paid off with reverse mortgage proceeds.
  • Purchase money mortgages: You can use a reverse mortgage for purchasing a home if you have sufficient cash to cover the difference between the sale price of the home and your reverse mortgage amount, plus closing costs.

How a Reverse Mortgage Works

  • A reverse mortgage provides income based on factors including borrower age, current mortgage rates, and appraised value of the home being mortgaged.
  • Borrowers can select from payment options including a lump sum payment, scheduled periodic payments, a line of credit, or a combination of a lump sum and scheduled payments.
  • Reverse mortgage fees: Although costs for reverse mortgages are comparable to traditional mortgages, FHA HECM loans also require payment of mortgage insurance premiums. Examine mortgage quotes closely for determining lender fees and other costs.
  • Reverse mortgages do not become payable until borrowers sell or otherwise vacate their home.
  • Borrowers maintain title to their home. When the property is sold, the reverse mortgage is paid off using sale proceeds; and any extra funds are refunded to the borrowers or their heirs.

Please consult a financial advisor for determining if a reverse mortgage is suited to your circumstances.

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