A Reverse Mortgage, also known as 'equity release' is a financial process that allows seniors to convert the equity in their homes into cash. The main reason to do this would be because monthly retirement income is not sufficient to survive.
To qualify you need to be a homeowner; be over 62 years of age own your home outright - or have a low mortgage; you must live in that home; and the property must meet minimum property standards. The money can be used for whatever you like - home renovations, vacation, pay medical expenses, new vehicle, paying off debts, or simply, to supplement income.
The loan is not taxable as it is considered to be a loan advance, not income, and no repayments are required whilst residing in the home, therefore an income stream is not required. The equity can be paid in three different ways: a lump sum; monthly for a fixed term; or as a line of credit. The loan can be restructured during the course of the loan.
The loan is usually structured so that it is collected, including accrued interest and other charges when the house is sold or after death. It differs from a second mortgage or a home equity line of credit - as no income is required - because no repayments are required. You therefore cannot be foreclosed or forced to leave your home because you missed a payment.
The size of the reverse mortgage is determined by the type of reverse mortgage selected, the person's age, the current interest rate, the home's location and the home's value. The older the borrower - the larger the percentage of the equity that can be borrowed. The owner retains the title to the property.
The property must be the borrower's primary residence - usually a single family, one-unit home. However some programs accept two-to-four-unit buildings that are owner-occupied. Some will grant reverse mortgages on condominiums and manufactured homes - provided they were built after June 1976. Mobile homes and cooperatives are generally not eligible for a reverse mortgage.
The loan will need to be repaid when: the last surviving borrower passes away or sells the property; all borrowers permanently move out of the house; the last surviving borrower does not live in the home for 12 consecutive months - due to physical or mental illness; the borrower fails to pay property taxes or insurance; or the borrower lets the property deteriorate beyond reasonable wear and tear.
The heir, or the last surviving borrower, does not have to sell the property to repay the reverse mortgage - they can refinance the reverse mortgage with a traditional mortgage loan -or through the use of other assets.
Sounds great - but - do be aware of the possible down side.
Interest payments, which are not tax deductable, are added to the loan - with no repayments required - this can eat into the equity - as the interest compounds - diminishing the equity and leaving less asset for the owner or heirs.
The cost - interest rates, originating fee, closing fee and service fee - all apply and can vary.
Good news: you cannot outlive the loan agreement and you cannot be forced to sell your home to pay off the mortgage loan!
Although Reverse Mortgages have been around for some time - they have not been fully understood. However, it is expected that as the baby boomers enter their retirement years they will have greater understanding and therefore less aversion to this way of self funding their retirement.
About the author: Gay Redmile is the webmaster of several finance and investment sites. Having recently assisted her father in taking out a Reverse Mortgage - she realises how important it is to undertake research and fully understand this process. For further important information visit her site at http://bestreversemortgagesite.com
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