What is a Reverse Mortgage?
Reverse mortgages are for people 62 and older and are considered a home equity loan. This means, monthly mortgage payments are eliminated and the equity in the home is paid to the borrower. Borrowers can receive payments in a lump sum, fixed monthly payments, a line of credit or in combination with monthly payments and a line of credit.
Reverse mortgages were developed to help members of the retired community who have limited income. Common uses for reverse mortgages are paying off debt, improving monthly cash flow, or paying off the existing mortgage. However, there are no restriction on how the funds can be used. Some borrowers have even applied for a reverse mortgage to have emergency funds on hand for unexpected expenses.
To qualify for a reverse mortgage you must:
- Be 62 years of age or older.
- Own your home outright, or have a substantial amount of equity.
- Live in the home as their primary residence.
- Homeowners are still responsible for paying taxes and insurance, failure to do so can result in a default on the loan.
- Since this is a FHA, government insured loan the property must be maintained and any necessary repairs must be completed.
Additional Information to Consider
New rules have recently been created to make reverse loans and smarter option for retired homeowners. Lenders are now required to conduct a financial assessment that analyzes the applicant’s assets and cash flow. This confirms that the homeowner is able to pay for taxes and insurance on the home. Borrowers must also meet with a financial counselor. The goal of the session is to explain the rules of reverse mortgages and to inform the borrower of other options that might be available to them.
Reverse mortgages are a good fit for people who plan to stay in their home for an extended period of time, can afford to maintain the home and who would like to supplement their income or have emergency funds.