What is a Reverse Mortgage?
A reverse mortgage also referred to as HECM (Home Equity Conversion Mortgage) is a loan that allows qualifying senior homeowners to access a part of their home’s equity and turn it into cash. There are no requirements for monthly payments to be made on the loan until the last surviving homeowner on title permanently moves out of the property or passes away. The homeowner is required to remain current on the property taxes, homeowners insurance and condominium fees/HOA fees (if applicable)
When the home is vacated, the estate can repay the balance of the reverse mortgage loan or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage loan.
Eligibility For A Reverse Mortgage Loan
To be eligible for a reverse mortgage loan, all homeowners must be at least 62 or older at the time of application. The home must be owned free and clear or all existing liens and mandatory obligations would need to be satisfied.
Difference Between A Reverse Mortgage and A Home Equity Loan
A home equity loan is a second mortgage, or a home equity line of credit (HELOC). When funds are requested by the homeowner then monthly payments will need to be made in order to repay the loan.
On the other hand, with a reverse mortgage loan, instead of making monthly mortgage payments to the lender, the borrower uses the loan proceeds as they wish and no monthly payments are required to be made until the home is vacated.
In the event of death or the home is no longer considered to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage loan and keep the home or put the home up for sale and use the proceeds to repay the loan. If the home is sold for higher than the balance of the loan, the remaining equity belongs to the heirs/estate.
If the sale of the home is not enough to pay off the reverse mortgage balance, the heirs or estate will not be responsible for the difference. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate in order to pay off the reverse mortgage loan.
Available Loan Proceeds
The amount that is available depends on many factors, such as: age, current interest rate, appraised value of the home and the sale price or FHA maximum lending limits. Also, the funds available may be restricted for the first 12 months after loan closing, due to HECM requirements.
Distribution Of Money From A Reverse Mortgage Loan
- A cash lump sum at settlement – This will provide the cash immediately, but the interest fees are the highest
- As cash payment or cash advance every month -This is applied for a fixed term or for the owner’s life
- A line of credit, similar to a home equity line of credit – This option maximizes the money available, which can be withdrawn only as needed
- Combination of the above, as the borrower chooses
Borrowers can access as much as 60 percent of the principal limit amount or all mandatory obligations, as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing.
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