What Is a Reverse Mortgage: A Guide on Eligibility, Repayment and More

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A warning and an ensuing update. Reverse mortgages have been the subject of a flurry of developments where the FHA, as insurer of most of these mortgages, is concerned. Since its inception, a reverse mortgage has been designed for senior borrowers to draw funds from their equity-rich homes.

Because it works differently from that of a standard home loan, the reverse mortgage has drawn its fair share of curiosity and criticism. To understand this financial product better, here’s a 101 on getting a reverse mortgage.

Aside from reverse mortgages, or HECMs, that are backed by the government, there are private-label reverse mortgages as well. But because HECMs dominate the reverse mortgage today, the guidelines found here are applicable to the government-backed reverse mortgages.

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What is a Reverse Mortgage: Top 10 Facts

Reverse mortgages are not your typical mortgages. First, there’s an age eligibility. Borrowers must be at least 62 years to qualify, although certain protections are afforded to spouses who are younger than 62. Age is an important factor in determining how much a borrower can get.

Second, they must own the home outright or paid down substantially their mortgages. This ensures that indeed the home has adequate equity to draw money upon.

Third and more importantly, reverse mortgages disburse funds to the borrowers in the form of a lump sum, a line of credit, or a periodic payment. These payments will continue until such time as the loan matures: when the borrower/s pass away, move out, or sell the home. This definitely runs reverse to how mortgages work traditionally.

Fourth, when it becomes due and payable, the loan must be paid off. The most usual route to paying off the loan is by selling the property based on its market value.

Fifth, the interest rate on a HECM reverse mortgage has an initial interest rate and an expected interest rate. The IIR is the note rate that accrues on an annual basis while the EIR exists to determine how much a borrower can qualify based on his/her home’s market value.

Sixth, the IIR won’t change in fixed-rate mortgages but will be variable in adjustable-rate mortgages. A borrower who opts for a fixed-rate mortgage will get a lump sum at closing while a borrower with a variable mortgage will get to choose among periodic disbursements, a line of credit, or a combination of both.

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Seventh, it’s important to emphasize that the borrower must be willing and able to pay property charges on the home. These cover the property taxes, the homeowners insurance, homeowners’ association fees, and so on. Failure to do so could lead to default.

Eighth, getting a HECM means paying the usual costs of getting a mortgage. Mortgage insurance premiums, origination fees, third party charges such as appraisal and title search, and servicing fees are part of a reverse mortgage’s cost.

Ninth, a reverse mortgage borrower must undergo counseling with a HUD-approved counselor to know if it is the right financial product.

Tenth, property types eligible for a HECM reverse mortgage are single-family homes, condo units in HUD-approved buildings, manufactured homes, and two-to-four unit homes in which the borrower occupies one unit. The borrower must continue to occupy the home as his/her primary residence.

How to Shop for a Reverse Mortgage

Being home equity loans, reverse mortgages have plenty of uses. For health care, debt consolidation, home improvement, and more. Older borrowers stand to benefit more because the higher the age, the bigger the amount one can borrow.

To ensure you get your equity and money’s worth, be sure you have checked all your possible options. If you settle for a reverse mortgage to help you in your retirement, make sure you get the right one.

Always shop for the best possible rates and don’t be afraid to ask questions. Be sure to talk with an HECM counselor about your future plans, especially on whether you can afford to pay the property charges.

Just like any financial product, it takes time to understand reverse mortgages. So take time to research, shop and decide.

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