A reverse mortgage, also referred to as a Home Equity Conversion Loan,
is a financial instrument that allows seniors to access the equity in
their home without income or credit qualifications. Seniors must be a
minimum age (country-specific), live in their own home, and have equity
in it. The important distinction between a reverse mortgage and a
conventional mortgage is that there are no principal or interest
payments required on the home while the borrower occupies the property.
In the case of two borrowers being on title, should one permanently
leave the property due to a death or hospitalization, the other borrower
continues to remain in the home. Repayment is only required if the
borrower sells the home, or moves out of the property for more than 365
consecutive days.
In a conventional mortgage, the homeowner makes
a monthly amortized payment to the lender; after each payment the
equity increases by the amount of the principal included in the payment,
and when the mortgage has been paid in full, the property is released
from the mortgage. In a reverse mortgage, the home owner is under no
obligation to make payments, but is free to do so with no pre-payment
penalties. The line of credit portion operates like a revolving credit
line, so a payment in reduction of a line of credit increases the
available credit by the same amount. Interest that accrues is added to
the mortgage balance. Additionally, with the line of credit option comes
a feature known as the creditline growth rate, a particularly
attractive feature not found in a traditional Home Equity Line of
Credit. Funds left or returned to the line of credit are subject to the
creditline growth rate which allows borrowers to gain on the unused
funds. So, for example, if the borrower has been approved for $100,000
and uses $25,000 of that amount, they will accrue growth on the $75,000
balance. Assuming the interest rate is 6% the creditline will grow to
$79,500—a gain of $4,500.
As with any mortgage, title to the
property remains in the name of the homeowners, to be disposed of as
they wish. As with a conventional mortgage, the title is encumbered by
the security interest the bank has in the reverse mortgage. If a
borrower does not make full monthly payments to cover the interest, that
interest is capitalized (added to the principal). In the event that the
interest accrues to a point that the amount owed is less than the
home's value the borrower may stay in the home and FHA will cover any
loss to the lender or borrower.
A reverse mortgage may be
refinanced if enough equity is present in the home and interest rates
have reduced, or more proceeds will be available to the borrower.
A
reverse mortgage lien is often recorded at a higher dollar amount than
the amount of money actually disbursed at the loan closing. This
recorded lien is at times misunderstood by some borrowers as being the
payoff amount of the mortgage. The recorded lien works in similar
fashion to a home equity line of credit where the lien represents the
maximum lending limit, but the payoff is calculated based on actual
disbursements plus interest owing.
A reverse mortgage lien is
recorded twice. The first time it is recorded by the lender. It is
recorded a second time by HUD. In the event that the lender should
become unable to continue in its obligation to make disbursements to the
borrower HUD will be able to immediately step in and ensure that the
homeowner will continue to receive their reverse mortgage disbursements.
It has been noted by some attorneys that while a reverse mortgage is
not an asset protection vehicle it may operate similarly in the event of
a personal injury lawsuit involving the borrower's home. An attorney
representing the plaintiff will first check to see the recorded home
value so as to know if the homeowner has funds with which to settle such
a claim. They will check to see the lien obligations on the home. The
records will show a total debt of about twice the value of what the
homeowner borrowed.
The cost of getting a reverse mortgage from a
private sector lender may exceed the costs of other types of mortgage
or equity conversion loans. Exact costs depend on the particular reverse
mortgage program the borrower acquires. For the most popular type of
reverse mortgage in the U.S., the FHA-insured Home Equity Conversion
Mortgage (HECM), there will be the following types of costs:
Mortgage Insurance Premium (MIP) = 2% of the appraised value[23]
Origination fee, depending on the home's appraised value[23]
appraised value under $125,000 = $2,500
appraised value over $125,000 = 2% of the first $200,000 plus 1% of the value over $200,000, with a $6,000 cap
Title insurance = varies by location
Title, attorney, and county recording fees = varies by location
Real estate appraisal = $300--$500
Survey (may be required) = $300--$500
http://en.wikipedia.org/wiki/Reverse_...
You are considered “moved out” if you haven’t lived in the home for a year. This includes if you enter a long-term care facility. So, if you are no longer able to stay in your home, but you haven’t died, you have to start repaying your reverse mortgage—at a time when money is likely already tight. This can put a real strain on your budget.
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