To better understand reverse mortgages, it is important to understand what they are and their history. In 1961, the first reverse mortgage was granted to Nellie Young who was a recent widow struggling to make ends meet in Portland, Maine. Luckily Nellie Young found Nelson Haynes, an employee of Deering Savings and Loan, who helped Young solve her financial problem. Haynes specially designed a loan, known today as a reverse mortgage, to help Young pay her bills and stay in her home. Initially a simple act of kindness, this type of financing revolutionized the mortgage industry by allowing homeowners to remain in their homes by converting their available equity.
In 1989, the U.S. Government created the Home Equity Conversion Mortgage (HECM) through the Department of Housing and Urban Development (HUD). According to HUD, reverse mortgages assisted nearly 80,000 Americans in the FY2010. This unique loan allows seniors to tap into the equity of their homes to gain greater financial independence by never having to make another monthly mortgage payment.
How a Reverse Mortgage Helps Seniors
This federally-insured loan allows seniors the freedom to choose to live in the comfort of their home instead of possibly moving to an independent living center or with relatives. These mortgages can offer seniors the opportunity to pay off debt and medical bills, supplement their social security and pension, or just complete a much needed home repair.
The way it works is by liquidating a portion of the home’s equity. This means borrowers can be rewarded for their years of hard work, dedication and commitment by using their home to remain in their home. Unlike a conventional mortgage, no monthly payment is required for the duration of the borrowers’ occupancy. As long as the homeowner resides in the home, they will never have to make another monthly mortgage payment again!
What are the Qualifications For A Reverse Mortgage?
To qualify for this unique mortgage, one must be 62 years old or older and live in the home as their primary residence. The FHA also requires that homeowners receive counseling from a HUD-approved agency before applying for the mortgage.
There are many types of homes that qualify for reverse mortgage. If a senior lives in one of the following they can take advantage of this unique loan:
- A single family home.
- 1 to 4 unit home or townhouse with one unit occupied by the borrower.
- A manufactured home built after July 1976 that complies with FHA guidelines.
- A condominium with FHA-approval.
In order to understand if a reverse mortgage is the right choice, it is important to understand all of the aspects of this particular loan. If one is short on cash and wants to tap into the equity of their home, a reverse mortgage may be the answer to their prayers. As long as a borrower maintains the home and its taxes and insurance, this financial product may be the right fit.
Benefits of a Reverse Mortgage
Another benefit of this type of loan is the mortgage does not have to be repaid as long as the homeowners remain in the home or remains current on real estate taxes, homeowner’s insurance, and home repairs. This means the homeowner will never have to make a monthly mortgage payment as long as they remain in the home. The funds that they are saving can be used however they wish with absolutely no restrictions.
How the FHA Protects Reverse Mortgage Homeowner’s and Their Families
If for whatever reason, a homeowner wishes to sell their home and move to a new permanent residence, they have that option. The money from the sale of the home will go toward the reverse mortgage balance and fees, and whatever is left over will be returned to the homeowner.
In the event of death the FHA has instituted reverse mortgage safety nets to help families through this transition. If the estate or heirs choose to sell the home then most likely the sale of the home will cover the remaining balance. Thus the remaining equity belongs to the heirs or the estate. However, if the heirs wish to keep the house then it will be their responsibility to pay the remaining balance and fees or obtain a traditional mortgage to finance the home. If for whatever reason the heirs cannot sell the house, then the FHA will pay the rest of the balance and take the loss. A reverse mortgage can help a senior homeowner access the funds they need to further enrich their life but will also insure their
families won’t be left with debt.
What are the Reverse Mortgage Loan Options?
Once all of these specifications are understood, then one can start to explore the loan options. The amount seniors can receive varies with age, home values, and interest rates.
Below are the five different disbursement options available with this federally-insured reverse mortgage loan:
- 1) Lump Sum – Immediate access to a substantial amount of funds loaned at a fixed rate.
- 2) Line of Credit – Have access to funds that are available whenever needed or until the line of credit is exhausted.
- 3) Tenure – Receive the same monthly payments for the rest of one’s life.
- 4) Term – Receive monthly payments for a set number of months.
- 5) Combination, also known as Modified Tenure or Term – Allows seniors to combine any of the above options to specify their payment needs.
Many mortgage companies find that most borrowers are choosing the lump sum option due to the stability of a fixed rate. However, just like anything in life, it’s important to understand the program and the way it works. Contact a reputable specialist today for more information.