What is a Reverse Mortgage?
Reverse mortgages are a special type of loan used to “unlock” the equity in older homeowners’ (ages 62+) homes, allowing seniors to cash in on the equity in their homes without conceding any ownership of the property. The tax-free income generated from the equity in the form of a loan is then available to the senior as a lump sum, fixed monthly payments, a line of credit, or a combination of these payment options.
Reverse mortgages are advantageous because all loan payments are deferred as long as the property remains the borrower’s primary residence. There is no obligation to repay the loan until the owner dies, the home is sold, or the owner otherwise vacates the property (for example, to move into an assisted-living facility).
Comparison to Traditional Mortgages
Reverse mortgage loans got their name because the cash flow is reversed; the lender makes payments to the homeowner/borrower, rather than the other way around.
In a traditional mortgage, the homeowner makes monthly payments to the lender and the equity in the property increases as the loan amortizes (the balance decreases). At the end of the loan term, the mortgage is paid in full and the lender removes the lien from the property.
In a reverse equity mortgage, the homeowner does not make any payments on the loan. All interest and fees accrued on the loan are added to the outstanding debt on the property, which can never exceed the value of the home, and a lien for the reverse mortgage is placed against the property.
How Much Money Can I Get?
The amount of money the homeowner is eligible to borrow depends on several factors:
• The age of the borrower (or of the age of the younger spouse)
• The appraised value of the property, minus the cost of any health or safety repairs required to bring the home up to code
• The lending limits (where applicable); lending limits vary on a county by county basis
• Interest rates, which are determined by the U.S. Treasury or LIBOR Index
• The payment plan selected by the borrower
In general, the age of the homeowner and the amount of equity in the property determine the amount of money available to be borrowed against. The older the homeowner and the more valuable the home, the more money the homeowner is eligible to receive.
What Types of Properties Qualify?
Single-family homes, two to four unit multi-family housing, manufactured homes (built after June 1976), townhouses, and condominiums are eligible for reverse equity mortgages.