When a reverse mortgage is mentioned, often the reaction is like offering someone toxic waste.
In the past, this reaction was justified. But now the reasons for the hatred of reverse mortgages have been mitigated or eliminated entirely, and the FHA and HUD are even regulating many of these proposals.
A reverse mortgage allows a homeowner over the age of 62 to borrow against the security of their home. A repayable mortgage occurs when the borrower moves out or dies.
Nathan Johnson, Reverse Mortgage Lending Specialist (www.todays reversemortgage.com) warns that if the lender is listed as co-owner, “this is not today’s reverse mortgage,” and encourages you to find another reverse mortgage.
Instead of requiring payments to be made like a regular mortgage, a reverse mortgage does not require payments. The loan interest is simply added to the loan amount. The amount of a reverse mortgage loan depends on the age of one of the borrowers and the assessed value of the house. The borrower – or at least one of the borrowers if it is a couple – must be at least 62 years old. The older the borrower, the greater the percentage of the appraised value the reverse mortgage can provide. For example, a 62-year-old man can claim 45% of the appraised value of a house, while an 82-year-old man can claim 65%. The amount of the advance will also be after the fees and closing costs have been paid.
The interest rate can be floating or fixed, with fixed rates currently in the range of 3% to 5%. A reverse mortgage is not like a home equity line of credit, which is often an adjunct to a basic mortgage. And most lenders will not provide a home secured home loan with a reverse mortgage.
Reverse mortgages are usually for primary housing rather than a holiday home or rental home. The lender will likely require the borrower to confirm that the home is the primary residence at the time the mortgage is issued, and may require periodic confirmation that it is still the primary residence. When the borrower moves, if the home still has equity, it goes to the borrower. Otherwise, the mortgage company will not prosecute the borrower – or the borrower’s property – for the difference.
There are several main types of reverse mortgages. Gives you revenue once. Another provides a line of credit. And some back-up mortgages provide both. A back-up mortgage can pay off an existing mortgage or can provide cash flow or funds to invest.
Next week, we will find out who can benefit from a reverse mortgage and what types of these loans may best suit their needs.
Linda Leitz is a Certified Financial Planner. You can contact her at email@example.com…