A reverse mortgage, or home equity conversion mortgage (HECM) converts home equity into cash. Money paid in over the years plus the value appreciation is
paid back to the homeowners who retain the title and continue to live in the in the property.
A reverse mortgage amortizes negatively. The payments the borrower receives add to the balance owed at the end of the loan and interest accrues at a fixed or adjustable rate. The borrower will never owe more than the property is worth, nor can the lender seek access to other assets. The lender places a lien on the property but as long as the borrower lives in and maintains the home, there is never any repayment obligation.
Events that trigger repayment include:
The borrower may pay off the loan through sale of the property or prepayment at any time without penalty.
Many senior homeowners are not aware that they have a solution to some financial issues when they own a home. You can improve your quality of life and living situation
by learning how tapping into your home's equity may alleviate some stress and contributes to a longer, happier lifestyle while still remaining in your home.
A Reverse Mortgage or Home Equity Conversion Mortgage can do the following:
HECM FOR REFINANCE
The HECM for refinance enhances the quality of life by increasing cash flow. Payout can be monthly, as needed, lump sum or a combination of methods.
HECM FOR PURCHASE
The HECM for purchase provides a lump sum for purchase of a home. Buyers usually need to make a substantial down payment.
HECM LINE OF CREDIT
A reverse mortgage line of credit allows the borrower to draw funds from the equity in the home as needed. The borrower pays interest only on the amount withdrawn and the remaining line of credit earns interest, at the same rate as withdrawals, like a savings account. If there is a small mortgage balance on a property, the homeowner could draw out the amount needed to pay off the existing mortgage and keep the rest available as a line of credit for future needs.
TAPPING BUILT-UP EQUITY
The main benefit or a reverse mortgage is allowing a homeowner to tap the built-up equit in the home by receiving immediate cash, lifetime payments, or a line of
Tenure payments provide a monthly income that will continue even if the homeowner outlives the actuarial life-expectancy tables.
Homeowners can live in the comfort and privacy of their own homes and with the security of stable income.
Neither the homeowner nor the heirs will ever owe more than the home is worth, even if the home value declines or payouts exceed the value. The lender cannot seek other assets to make up for a shortfall. If the homeowner or heirs try to sell the property in an arm's-length (not to a relative) sale and the proceeds fall short, the remaining balance is excused. Mortgage insurance compensates the lender for a shortfall.
The IRS does not consider money borrowed through a reverse mortgage taxable income.
HIGH-RISK, LOW-RETURN INVESTMENTS
PURCHASE AN ANNUITY
LOW EQUITY OR PROPERTY VALUE
SHORT-TERM, SMALL FINANCIAL NEEDS, NO COMPELLING NEED
SUBSTANTIAL OTHER ASSETS
PAYING FOR NURSING HOME CARE, BUYING INTO A CONTINUING CARE COMMUNITY, BUYING NEW HOMES NOT READY FOR OCCUPANCY
WHO OWNS THE PROPERTY?
A child or grandchild whose name has been added to the title can disqualify the borrower.
It's a bad idea to remove a co-owner, spouse or life-partner from a title for the purpose of qualifying for a reverse mortgage; if the older resident passes away or must move out, to a nursing home or assisted living, for more than 12 months, the loan comes due and the remaining resident will have to pay off the loan or move out.
WHAT DO HEIRS RECEIVE?
When the last surviving homeowner passes away, the remaining equity in the property goes to the heirs, not the bank. But heirs must either pay off the loan to keep the home or sell it to access the equity. Heirs have a choice to sell (must be an arm's length sale) the house to pay off the debt, pay off the debt from another source, or obtain a new forward mortgage on the home.
If the house sells for less than the mortgage balance, the lender is compensated for the difference by FHA Insurance.
If there are no heirs, the bank may take possession of the home and sell it. The estate may retain ownership of the property but it must pay off the loan.
Don't underestimate the importance of the counseling session. It must be completed before going forward with the application process. The Certificate provided by the counselor becomes part of the application file. It would be a wise choice to have a relative or friend present to participate in this counseling session. The lender cannot be a part of this process.
The counselor is responsible for:
The counselors may charge a fee, so ask in advance, it's usually about $125. This fee may be reduced or waived in certain circumstances based on the ability to pay but they cannot refuse on the basis of inability to pay.
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