Reverse mortgages (also called home equity conversion loans) enable senior homeowners to tap into their equity without selling their home. The lender pays you money based on the equity you've accrued in your home; you receive a lump sum, a monthly payment or a line of credit. Repayment is not necessary until the borrower sells the property, moves into a retirement community or passes away. When you sell your home or no longer use it as your primary residence, you or your estate must repay the cash you received from the reverse mortgage plus interest and other finance charges to the lender.
at least 62 years of age and maintain the property as your principal residence.
Most reverse mortgages require you be
Reverse mortgages are ideal for homeowners who are retired or no longer working and need to supplement their income. Interest rates can be fixed or adjustable and the money is nontaxable and does not interfere with Social Security or Medicare benefits. Your lender cannot take property away if you outlive your loan nor can you be forced to sell your home to pay off your loan even if the loan balance grows to exceed property value.
If there is a downside to reverse mortgages, it is the upfront fees that the borrower must pay. There is typically a 2% loan origination fee that is based upon the value of the home instead of the loan amount which is more typical in the mortgage industry. The standard fees associated with a mortgage loan such as escrow, title, appraisal, etc. apply as well. Unique to the reverse mortgage is an insurance premium that must be purchased upfront that guarantees the mortgage for the lender from the unique risk inherent in a reverse mortgage. Since a homeowner who has a reverse mortgage cannot be forced to leave the home, even if they have pulled out all the equity in the home (or even more than 100% of the home's value) and they are guaranteed to receive the monthly payment (provided they have selected the monthly payment distribution) for as long as they live, the lender has a greater risk of loss in a declining market or in the wonderful event that the borrower significantly outlives the life expectancy of average individual. That extra risk requires an extra insurance policy to protect the lender from losing money.
The benefit, as we see it, comes to the borrower who has equity in their home but does not have enough income to provide for the lifestyle they desire. Individuals living on a fixed income have the most to benefit. Imagine an individual with a house valued at $300,00.00 with a $100,000.00 mortgage. Each month they pay $600.00 on their mortgage payment and they try to stretch the remaining income to cover all of their expenses. With a reverse mortgage, they would no longer pay the $600.00 per month on their mortgage and they would also receive approximately $600.00 per month in monthly payments from the bank out of the equity in their home. Effectively, they have increase their cash flow position by approximately $1,200.00 per month.
For more information on reverse mortgages, call us at: (209) 578-9000 or download our free booklet on Reverse Mortgages by clicking the link below or download a copy from the Reverse Mortgages menu.