All About Reverse Mortgages: The Basics

by | Feb 10, 2016 | Financial Services

Recent Articles

Categories

Archives

Since the Federal Housing Authority introduced the first reverse mortgage in 1989, such mortgages have become an important financial tool for homeowners everywhere. If you have ever considered taking out a reverse mortgage, there are a few things you need to know prior to taking the plunge. Reverse mortgage specialists can help you navigate the world of mortgages – explaining the basics of each loan type. Understanding what a reverse mortgage is, how it works, the eligibility guidelines and various pros and cons will help you select the best loan for your financial needs.

What is it?

A reverse mortgage – in its simplest form – is a type of home loan that was specifically designed for older adults. While the borrower is responsible for payment of all property taxes and homeowner insurance fees, there is no monthly mortgage payment.

How Does it Work?

Most people purchase their home with regular mortgages or forward loans. With this type of loan, you essentially borrow money from a lender, make monthly payments on the loan and slowly build equity. Over the life of the loan, your debt decreases and your equity increases – until you have paid off your loan and owned your home outright. A reverse mortgage works a bit differently. Rather than paying a lender each month, the lender pays you. The lender pays you either a lump sum or monthly cash advance, based on the estimated value of your home. You keep the title to the home, which serves as your security deposit – so to speak. The loan period ended when you chose to sell the home and move or pass away – thus enabling the lender to sell the home and collect the return.

Who is Eligible?

HECM loans are the most common when it comes to reverse mortgages. HCEM stands for Home Equity Conversion Mortgage and is geared towards older adults. These loans are issued by private banks and insured through the Federal Housing Authority. While there are no specific income limitations, medical exceptions or guidelines for how the money must be spent, there are some specifications for qualification. To qualify, applicants must be aged 62 or older, own the home, live in the home and be able to make payments on a consistent schedule for all associated fees. Homeowners must also participate in a counseling session with a reverse mortgage specialist prior to applying.

Pros and Cons

While reverse mortgages are a unique financial tool, they are still relatively new – so there is always the potential for some kinks. At a later point in life, individuals aren’t necessarily in a position to deal with severe financial set-backs – so it is wise to go through the counseling session and really understand what the loan entails before signing any official paperwork. In terms of advantages, there are many. HECM loans require no monthly payments – so borrowers do not have to worry about remembering to pay a set fee on a specific date each month. HECM reverse mortgages also have no pre-established maturity date and are considered “non-recourse” loans, meaning that borrowers and their heirs are not responsible for any balance exceeding the cost of the home at the time the home is sold to pay back the loan.

Related Articles