A reverse mortgage may be available as a loan option for some senior citizens. With a reverse mortgage, the homeowner is allowed to trade some or most of their home equity in order to receive a sum of money (or monthly payments). They are sometimes called “home equity conversion mortgages” or “HECM” loans.
Reverse mortgages don’t need to be repaid until the senior citizen homeowner becomes deceased, or if they decide to move out or sell their home. A good thing about reverse mortgages is that the money obtained can be used for anything.
Also, if the person’s total withdrawals exceed the value of the house when it’s sold, the lender is protected against loss through Federal Housing Authority insurance. Thus, lenders are generally willing to issue a reverse mortgage, since there are benefits for both the creditor and the borrower.
Not all persons are eligible to obtain a reverse mortgage. Generally speaking, reverse mortgages are available to homeowners who are over age 62, and whose mortgage is completely or close to being paid off. For joint homeowners, both of the homeowners must be at least 62 years old. The ideal candidate is a senior citizen retiree with low income and a relatively valuable home.
While most reverse mortgages don’t involve an income or credit test, some jurisidictions do require that the homeowner(s) undergo financial counseling.
With a reverse mortgage, a person is usually allowed to borrow up to 80% of their equity interest. Also, there may be annual upper limits that are enforced, depending on the geographic region where the home is located. Finally, if the property value increases over time, the borrower is usually entitled to draw more until they reach the set limit.
The majority of reverse mortgages come in the form of an adjustable-rate package. However, more and more lenders are beginning to issue fixed-rate loans involving larger denominations.
Some advantages associated with reverse mortgages are:
- Need not be repaid until death or transfer of the property
- Money can be used for any purpose (i.e., travel, leisure, etc.), and not just property improvement
- Lenders are usually willing to work with the borrower, since the lender is usually protected through federal insurance
A few of the disadvantages of reverse mortgages are:
- The homeowner will still be responsible for expenses associated with the home, such as maintenance, taxes, etc.
- Can sometimes be more expensive overall than standard loans
- Lenders often charge service fess like origination fees, and closing costs (closing costs can reach over 5% of the property value)
Thus, if you are considering a reverse mortgage, you’ll want to consider how these aspects apply to your situation. For example, if you’re planning to sell your home and permanently resettle somewhere else, it could terminate your reverse mortgage. On the other hand, if you have low income but a high amount of equity, you might consider a reverse mortgage to help with your income, since you probably won’t exhaust all of your equity.
Reverse mortgages for senior citizens are becoming an attractive option for those who have much equity in their property. If you are considering a reverse mortgage, you may wish to contact a real estate lawyer for advice and assistance. Your lawyer can help you understand how property laws work in your area (reverse mortgage limits often depend on the region). Or, if you have a dispute over an existing reverse mortgage, a lawyer can help you file a claim in court.