Reverse Mortgage Loans
In a traditional loan, the borrower repays the loan by making monthly payments. In a reverse
mortgage the lender pays the borrower a monthly payment, and then looks to the house as
repayment when the borrower dies. In the event the borrower moves away or sells the property, then
the loan is required to be paid back. In order to get a reverse mortgage a borrower must fulfill
two basic requirements
- Be 62 years or older
- Have 100% equity in your property (or very close to it)
Lenders cannot predict the lifespan of any one individual, but they do know the average life
expectancy of individuals. By using this average and statistical analysis they have determined
the qualifying age to be 62 years old. As people on average begin to live longer, the minimum
qualifying age will likely increase just as with Social Security.
A very relevant question that comes up with reverse mortgages is can a lender look beyond the
property for repayment, in the event the property did not cover the full loan amount? The answer
is no. The lender can only look to the property for repayment. If a person lives past the
average life expectancy and received more monthly payments, the lender can still only look
to the property for repayment. The FHA has a reverse mortgage offering known as the
Home Equity Conversion Mortgage.
Like other mortgages offered by the FHA the reverse mortgage
is subject to loan limits and other requirements. Another option is the
Fannie Mae Reverse Mortgage
also known as the Home Keeper Mortgage. The Fannie Mae reverse mortgage is also subject to loan limits. If the loan limits are a major concern when borrowing then it is possible to find a lender who will underwrite a jumbo reverse mortgage.
In almost any reverse mortgage program the size of the monthly payment depends on 3 basic factors:
Age
The age of the borrower is of particular interest to a reverse mortgage lender.
The longer a borrower lives, the longer the lender will have to be giving monthly payments.
Since an older borrower is more likely to pass away sooner, the lender will likely pay
a higher monthly payment the older the borrower is.
Value of the Home
The loan amount of a reverse mortgage will be determined by the value of the borrower's home.
The value of the home will likely be a bigger factor if you are applying for a no limit reverse
mortgage. The reverse mortgage programs offered by the FHA limits the maximum amount just like
it does for other loans.
Home Equity
The greater the equity in the home, the higher payment a borrower will likely receive. Some
reverse mortgages take into consideration the increase in housing prices when determining
the size of the monthly payment.
Although all reverse mortgages are generally the same concept, there can be significant differences
in the specifics. Most notably is how the lender makes the payments. The most common types are:
Tenure
Consists of equal monthly payments, which are made until the last borrower lives in the house
as the primary residence. Monthly payments are determined by the age of the youngest borrower, and equity in the home. Payments are received until death, if ownership and residency requirements
are met.
Term
Consists of equal monthly payments for a pre-determined number of months. Age and equity determine
the maximum amount that can be borrowed. The borrower selects how much to receive every month.
After the last payment is made to the borrower, no more payments will be made, however repayment of the loan is not required as long as ownership and residency requirements are met.
Line of Credit
The timing and size of the payment is at the borrower's discretion, until the limit is reached.
Once again, repayment is not required as long as ownership and residency requirements are met.
Modified Tenure
The modified tenure option is a hybrid of a tenure and a line of credit. For example if a borrower
is qualified to receive $200,000 total with $1,000 every month, then under the modified tenure options a borrower can choose to receive $100,000 upfront then monthly payments of $500 instead.
Modified Term
The modified term option is a hybrid of line of credit and term reverse mortgages. The modified term works just like a modified tenure, except that the monthly payments are paid for a specific amount of time instead of over the life of the borrower.
A reverse mortgage is just like any other loan, and it is important to research the various options available. The American Association of Retired Persons (AARP) has a list of counselors that can
be consulted for more information about reverse mortgages.
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