A Reverse Mortgage, also called Home Equity Conversion Mortgage (HECM), is a type of loan for homeowners over the age of 62, which turns equity saved up in a home into cash. It is a method to improve seniors’ financial position and helps reduce expenses and increase available cash.
There are three primary factors determining whether a person is eligible for Reverse Mortgage. Not only does the borrower have to be 62 years or older, but also does he or she need to have enough equity to eliminate any existing mortgages. Moreover, the FHA must approve the home type, typically a single family home.
Using Reverse Mortgages to Age at Home
When securing a Reverse Mortgage, money from home equity can be used without any restrictions while remaining owner and living in the home. Therefore, seniors have the possibility to finance skilled nursing or other in home care, cover medical expenses and fund home improvements making the home more suitable for seniors.
There are two financial benefits of a Reverse Mortgage.
- Eliminate Mortgage Payments
By being eligible for a Reverse Mortgage, all monthly mortgage payments are eliminated, as the loan will pay off the balance on the existing mortgage. This can represent a huge financial relief for elderly homeowners, as monthly expenses will decrease significantly.
- Access Cash Benefit
Homeowners can receive a cash benefit that is further supplement income if there is enough equity in the home.
The amount of money that can be secured by using a Reverse Mortgage is based on calculations, which consider the homeowner’s age, current interest rates, the appraised value of the property, any outstanding mortgages or other liens on the property as well as the maximum loan limits set by the HUD (Department of Housing and Urban Development) and the FHA (Federal Housing Administration).
Repaying the Reverse Mortgage
The loan has to be repaid once the homeowner ceases to occupy the home as a principal residence, which is typically if he or she does not live in the home for more than 12 months or happens to die.
The homeowner or the heirs/estate can repay the Reverse Mortgage with or without a sale of the home. Furthermore, the home value or sales price sets the upper limit for the repayment obligation.
Downsides of Reverse Mortgages
One disadvantage of Reverse Mortgages is fees associated with the transaction. These can be higher than those associated with a traditional mortgage. In addition, Reverse Mortgage is a complex topic. It needs to be fully understood before taking any steps in order to avoid unwanted surprises.
For more in-depth information and a personal Reverse Mortgage calculator, have a look at the National Reverse Mortgage Lenders Association. Also, it may be helpful to contact a local lender in order to receive personal advice.