A reverse mortgage is a specialized loan for seniors 62 and older who want to turn the equity in their home into tax free cash also known as an equity release. A portion of the equity is made available to the borrower in a form of their choosing and the remainder is kept in the home. The borrower can choose payment options like a lump sum, credit line, term payments, tenure payments (lifetime guaranteed) or any combination of them. A reverse mortgage is different than a traditional mortgage because there is no monthly mortgage payment due; instead the lender uses the remaining equity in the home to make the payment to the borrower. The property taxes and home owners insurance must still be paid by the borrower. Nonpayment of the property taxes and insurance can trigger the loan coming due early and result in foreclosure. It is imperative that potential borrowers understand the consequences of not keeping the property taxes and homeowners’ insurance current at all times.
There are a few differences between a traditional/forward mortgage and a reverse mortgage; mainly the payment. With a traditional mortgage the borrower is required to make a monthly payment which usually goes toward the principal and interest (sometimes just interest) and lowers the amount owed to the lender/bank. With a reverse mortgage the borrower is not required to make a monthly mortgage payment for as long as they occupy the home; this causes the loan amount to grow over time and is the reason for saving the additional equity. Payments can be made on a reverse if the borrower would prefer to maybe make one when they feel like it but it is not required. There is also no prepayment penalty on a reverse mortgage. Once a reverse mortgage borrower no longer occupies the home the loan would come due and the borrower would owe the original amount borrowed plus any interest that has accrued. Once the reverse mortgage becomes due the borrower or their heirs (depending on if the borrower passed away or just decided to move out) would either sell the home to pay the lender and keep any additional equity or refinance out of the loan if they prefer to keep the home. They would have 6 payment free months to do this and could receive two additional 90 day payment free extensions if requested.
The benefits of the reverse mortgage are many. A reverse mortgage will give the borrower the freedom of knowing that they have the additional income. It allows home to work for and pay the borrower. The borrower also retains the title of the home. The reverse mortgage is a lien similar to a traditional mortgage. The only way to default on a reverse mortgage is by not paying the property taxes and homeowners insurance (HOA dues as well if they are applicable). A reverse mortgage will change the equity position in the home so it is good to discuss it with family and trusted family advisors. There are currently no health, income or credit requirements to obtain a reverse mortgage. Qualification is based solely on age, occupancy status and equity. With a reverse mortgage, seniors can put the equity in their home to work for them rather than having it sitting there and do nothing. There are several different types of FHA reverse mortgages so speak to a professional reverse mortgage specialist to see which is right for you.