Reverse Mortgage Explained

September 11, 2009

in Personal Finance

Reverse mortgages have existed for a few decades, but only recently have they received a significant amount of press. Touted as a way for senior citizens to utilize the equity in their homes, reverse mortgages have become increasingly common. But is a reverse mortgage right for you?

As the name suggests, a reverse mortgage is pretty much the opposite of a regular mortgage. Instead of taking out a loan to buy a home, you put up your home as collateral and receive money. But unlike a home equity loan, you do not have to make monthly payments. No payment is due until the borrower dies, sells the home or moves out for twelve months or more. When one of these events occurs, the loan must be paid in full, including accrued interest. This is accomplished by selling the home or obtaining a traditional mortgage.

The proceeds of a reverse mortgage may be distributed in a few different ways. The borrower can take a lump sum payment. He can request a line of credit to use as needed. Or he can elect to receive monthly payments. Some lenders will even allow you to receive payments by two different methods, such as half in a lump sum and the other half as monthly payments.

Requirements for a Reverse Mortgage

Unlike other mortgages, a reverse mortgage does not subject the borrower to income requirements. Since there are no monthly payments, there is no need to verify income. The amount a homeowner is eligible to borrow is dependent on the equity he has in his home.

There are, however, a few requirements that must be met. These include:

* The borrower must be at least 62 years of age. If there is a co-owner who is under 62 years old on the home’s title, that person’s name must be taken off before the loan can be made.

* You must have a certain amount of equity in your home. If you have an existing mortgage, it must be paid off. But you can use the proceeds of the reverse mortgage to do this.

* There are certain criteria that the home must meet to qualify. The owner must live there, and if it’s a multi-family dwelling, there must be four units or less. Manufactured housing must meet certain requirements to qualify.

* Before a reverse mortgage can be made, the borrower must undergo counseling approved by the Department of Housing and Urban Development (HUD). The purpose of this counseling is to make sure the borrower understands how the reverse mortgage works. When completed, the borrower receives a certificate that must be presented to the lender.

A reverse mortgage can provide funds to senior homeowners to use any way they choose. They do not have to make monthly payments, and they can remain in their homes for the rest of their lives or until they choose to move out or need to do so for long-term care. But it’s very important to understand all of the implications of a reverse mortgage before making a decision.

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