A reverse mortgage is a low interest loan for senior homeowners that will use a home equity as collateral. The loan amount is a percentage of the property’s value determined by the age of the youngest homeowner. The loan does not have to be repaid until the last surviving homeowner moves out of the property or passes away. When that happens, the estate has about 12 months to repay the balance or sell the home to pay off the balance. All of the remaining equity is then inherited by the estate. The estate is not liable if the home sells for less than the balance of the reverse mortgage.
Eligibility
To be eligible of a reverse mortgage the FHA requires that all homeowners be over the age of 62. The property must be owned free and clear or have a mortgage balance that is no more than approximately 65% of the home’s value.
Eligible home types
Most home types are eligible. Mobile homes must be built within the last 30 years, the land must be owned, it must be on a permanent foundation and it must be FHA approved.
Difference between a reverse mortgage and home equity loan
Generally a home equity loan, a second mortgage or a home equity line of credit have much more strict requirements for income and credit worthiness. A reverse mortgage has no income or credit requirements and instead of making monthly payments, the homeowner will receive payments.
The amount that can be borrowed is determined by age, the current interest rate and the appraised value of the property. The older the homeowner, the lower the interest rate. The more valuable the home, the higher the amount will be.
Outliving the reverse mortgage
A reverse mortgage cannot be outlived. If at least one homeowner lives in the home then the loan does not need to repaid.
Estate Inheritance
In the event of a death or if the home ceases to be the primary residence, the homeowner’s estate can choose to repay the reverse mortgage or just put the home on the market.
If the equity in the home is worth more than the balance of the loan, the remaining equity automatically will go to the heirs. No other assets are affected by a reverse mortgage. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss.
Loan Limit
The amount that is available depends on three things: age, current interest rate and the value of the home.
Distribution of money from a reverse mortgage
There are a few ways to receive the proceeds and you can mix and match if you wish
- Lump sum: a lump sum of cash at closing
- Tenure: equal monthly payments as long as the homeowner lives in the home
- Term: equal monthly payments for a fixed number of years
- Line of Credit: Draw any amount at any time until it is finished