How A Reverse Mortgage Works
Wednesday, November 01, 2006
Ever wonder how a reverse mortgage works? For folks that have
lived in their home for a long time, they may very well be
sitting on a gold mine. Home prices have increased greatly over
the last thirty years, and nationally have nearly doubled in
value over the last ten years. This has left a great many
homeowners with valuable equity in their homes and many
different options to access that equity, home equity loans and
mortgage refinances being the most common. For older Americans,
there is another, less common option that is growing in
popularity as home prices have increased and baby boomers have
moved closer to retirement age: the reverse mortgage. But do
you know what it is, and do you know how a reverse mortgage
works?
So what exactly is a reverse mortgage? A reverse mortgage is a
loan product that allows homeowners 62 years of age and older
to use their equity to generate tax-free income, without having
to sell the home or take on a new mortgage payment. In fact the
reverse mortgage is exactly what the title states, the reverse
of a standard mortgage. With a standard mortgage, the borrower
(or homeowner) makes monthly payments to the lender (or bank or
mortgage company), in order to pay back the loan that the lender
originally lent to for the purchase or refinance of the house.
This payment includes interest that the lender charges the
borrower for the loan. In a reverse mortgage, the situation is
reversed; the lender makes monthly payments to the borrower.
However, in both a standard and reverse mortgage, the lender
secures their loan amount by using the house as collateral.
There are a few factors that determine how much money a
borrower will receive from a reverse mortgage, such as the
value of the home, borrowers (and co-borrowers) age, current
interest rates and any lending limits that may be standard for
your geographic area. As a rule of thumb, the older the
borrower and the more valuable the home, the larger the
available loan amount. Homeowners can choose how they want to
receive their payments, either as a lump sum, monthly payments
or as a line of credit. The line of credit is the most popular
option, with nearly 60% of reverse mortgage borrowers choosing
to the option to draw income or a lump sum off the line at the
time of their choosing. And the proceeds from the reverse
mortgage can be used for anything, completely at the discretion
of the borrower, though most borrowers use the funds for home
repairs or modifications, health care expenses, to settle other
debts, or for their long-planned vacation! Reverse mortgages are
available for nearly all property types with the exception of
co-ops, though co-op owners in some metropolitan areas,
specifically New York, should have local options. If you are in
retirement, or nearing retirement, and think this may be the
product for you, I will go into more detail about exactly how a
reverse mortgage works.
For reverse mortgage borrowers with an existing mortgage, that
mortgage will need to be paid off completely, so that the new
reverse mortgage will be the only lien on the house. If the
proceeds from the reverse mortgage are not ample to pay off the
existing mortgage, the borrower will need to access savings or
other sources to pay off the rest of existing mortgage amount.
In this scenario, the borrower wont have access to any
additional funds from the reverse mortgage; however, they will
no longer have a mortgage payment! The more common scenario is
one in which there is a small or no mortgage on the home and
then the borrower is able to access nearly the full amount of
the reverse mortgage to use at their discretion. No monthly
payments are due on the loan and the loan is repaid when the
moves or sells the home, passes away, or ownership otherwise
changes hands. If the home is sold and the proceeds of the sale
exceed the mortgage amount, the balance belongs to the borrower
or their heirs.
One very important facet of the reverse mortgage process is the
consumer counseling that is required for borrowers contemplating
a reverse mortgage. Your lender can help you find counseling
agencies and most programs are approved and monitored by HUD
and/ or AARP. The counseling is required to make sure that the
terms and risks of the program are clear to you. Counselors are
obligated by law to review with you all of the implications of
the new mortgage, and what your potential options are.
Overall, for older Americans contemplating a stress-free
retirement, the reverse mortgage may be just the option! Just
make sure that you know your options and goals
and how a
reverse mortgage works.
About The Author: Brad Stroh is currently co-CEO of Freedom
Financial Network and http://www.Bills.com. If you would like
more of Brads http://www.Bills.com/sitemap/, please visit the
Bills.com information on http://www.Bills.com/mortgage/
posted by Dennis Cheesman @ 12:48 PM,
