A reverse mortgage, also referred to as a Home Equity Conversion Loan, is a financial instrument that allows seniors to access the equity in their home without income or credit qualifications. Seniors must be a minimum age (country-specific), live in their own home, and have equity in it. The important distinction between a reverse mortgage and a conventional mortgage is that there are no principal or interest payments required on the home while the borrower occupies the property. In the case of two borrowers being on title, should one permanently leave the property due to a death or hospitalization, the other borrower continues to remain in the home. Repayment is only required if the borrower sells the home, or moves out of the property for more than 365 consecutive days.
In a conventional mortgage, the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full, the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance. Additionally, with the line of credit option comes a feature known as the creditline growth rate, a particularly attractive feature not found in a traditional Home Equity Line of Credit. Funds left or returned to the line of credit are subject to the creditline growth rate which allows borrowers to gain on the unused funds. So, for example, if the borrower has been approved for 0,000 and uses ,000 of that amount, they will accrue growth on the ,000 balance. Assuming the interest rate is 6% the creditline will grow to ,500—a gain of ,500.
As with any mortgage, title to the property remains in the name of the homeowners, to be disposed of as they wish. As with a conventional mortgage, the title is encumbered by the security interest the bank has in the reverse mortgage. If a borrower does not make full monthly payments to cover the interest, that interest is capitalized (added to the principal). In the event that the interest accrues to a point that the amount owed is less than the home’s value the borrower may stay in the home and FHA will cover any loss to the lender or borrower.
A reverse mortgage may be refinanced if enough equity is present in the home and interest rates have reduced, or more proceeds will be available to the borrower.
A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.
A reverse mortgage lien is recorded twice. The first time it is recorded by the lender. It is recorded a second time by HUD. In the event that the lender should become unable to continue in its obligation to make disbursements to the borrower HUD will be able to immediately step in and ensure that the homeowner will continue to receive their reverse mortgage disbursements. It has been noted by some attorneys that while a reverse mortgage is not an asset protection vehicle it may operate similarly in the event of a personal injury lawsuit involving the borrower’s home. An attorney representing the plaintiff will first check to see the recorded home value so as to know if the homeowner has funds with which to settle such a claim. They will check to see the lien obligations on the home. The records will show a total debt of about twice the value of what the homeowner borrowed.
The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. For the most popular type of reverse mortgage in the U.S., the FHA-insured Home Equity Conversion Mortgage (HECM), there will be the following types of costs:
Mortgage Insurance Premium (MIP) = 2% of the appraised value
Origination fee, depending on the home’s appraised value
appraised value under 5,000 = ,500
appraised value over 5,000 = 2% of the first 0,000 plus 1% of the value over 0,000, with a ,000 cap
Title insurance = varies by location
Title, attorney, and county recording fees = varies by location
Real estate appraisal = 0–0
Survey (may be required) = 0–0
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In this video, USA Reverse addresses how a reverse mortgage works. To learn more about reverse mortgages, and how they work, visit https://www.USAReverse.com today.
How Does a Reverse Mortgage Work
A reverse mortgage can be a good way to supplement your retirement income. Let’s look at how it works.
First, think of how your home mortgage works. As you make monthly payments, the amount of equity you have in the home increases.
This equity is money that is tied to the value of your home.
A reverse mortgage allows you to borrow that money in payments made back to you.
As you receive cash payments the equity in your home is slowly reduced. Also, your loan balance slowly increases over time.
The reverse mortgage loan is repaid when the homeowners or borrowers leave the home.
A reverse mortgage thus allows you to access the cash in your home, while you still own it and live in it.
There are some rules to reverse mortgages.
The borrower must be at least 62 years old.
The home must be your primary residence.
You must own your home and have substantial equity in it.
You must be able to keep up with property taxes, insurance, and homeowner’s insurance fees.
Many other rules also apply. Make sure you understand them all, before you apply.
If you’re interested in a reverse mortgage? Here are five simple steps on how to get started .
Step 1 – A USA Reverse licensed representative will provide you a no-obligation review.
Step 2 – You are required to get counsel from a certified HUD counselor.
Step 3 – A USA Reverse licensed representative will walk you through the entire application process.
Step 4 – During processing, your home is appraised, documents are signed, reviewed, and the loan approval depends on this process.
Step 5 – After closing the loan you begin to receive funds either in monthly installments, a lump sum payment or a line of credit. You can use the funds as you desire.
If you would like to learn more about reverse mortgages, call USA Reverse today.
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