Facts About Reverse Mortgages

Reverse mortgages are a fairly new trend. This type of loan allows senior citizens, age 62 and older, to convert the equity in their homes into a source of income, without having to sell the home. The accumulated equity in their home is sometimes the only asset a senior has to help them meet urgent medical expenses, home improvement costs, or other pressing needs. Counseling is usually a required part of the approval process for reverse mortgages, due to their complexity.

What makes a reverse mortgage unique? It does not require immediate payment. The payment from the lender is usually in the form of a lump sum, in monthly installments, or as a line-of-credit. The senior retains title to the home and continues to be responsible for paying property taxes, insurance, and upkeep of the property.

A reverse mortgage is also considered a "non-recourse" loan, meaning that the lender cannot seek repayment from any source except the property that secures the loan. They are also "rising-debt" loans, meaning that as cash advances are paid out to the borrower, interest accrues and is compounded, and over time the total amount owed increases significantly. Insurance and taxes also get added monthly to the balance. This can be detrimental to a senior on a fixed income who may be having a difficult time paying off the loan.

As stated earlier, a reverse mortgage is only available to senior citizens, age 62 and older. They must own their home free and clear, or have a low outstanding mortgage balance or other lien which can be paid off with the loan proceeds. There are no income or credit qualifications, so it is a great option for low-income seniors.

An important requirement for obtaining a reverse mortgage is attendance at a consumer education session. Borrowers must receive mortgage counseling from a HUD-approved agency. The session must include a discussion of other options available to the homeowner; the financial implications of a reverse mortgage; the tax consequences of a reverse mortgage; the impact on eligibility for federal and state assistance programs; and the implications for the borrower's estate and heirs.

The amount of money the borrower receives is determined based on age, interest rate, and the value of the home. The older the borrower, the larger the percentage of the home's value that can be borrowed. The lender provides the cash in one of these basic payment forms:

• The homeowner will receive the cash all at one time in one lump sum.
• A tenure plan, where the homeowner receives monthly payments for as long as the home is occupied as a principal residence.
• A term plan which provides monthly payments for a fixed period of time.
• A line-of-credit where the homeowner is allowed to draw up to a maximum amount of cash at times and in amounts of the homeowner's choosing as long as they occupy the home.

Reverse mortgages are not for everyone, and it is in one's best interest to look in to alternative options, such as eligibility for other programs.