I have been asked countless of times what a reverse mortgage is. Basically, a reverse mortgage is an excellent way to take a loan against your principal asset. All types of borrowings, being flexible in terms will cost the borrower. Reverse mortgage will utilize your house and the deal is generally described as “rising debt, falling equity”.
In comparison to reverse mortgage, the kind of mortgage generally applied when you are purchasing a property can be classified as a “forward mortgage”. It will be easy to get approval for this type of mortgage if you are earning a specific amount on a regular basis. As the mortgage uses your house as a security, if you fail to pay the monthly payments, you can consider your house gone. When the house is fully paid, then the equity becomes the difference of the payments you have made versus the mortgage amount. When the last payment is made on the mortgage loan, then you now truly own your house and heave a sigh of relief.
Conversely, the reverse mortgage type does not require a good credit history nor does it require the borrower to have a regular source of money. The assumption is that the borrower owns the home. What is basically looked at is the applicant’s age as they require a minimum age. The older the applicant is, the higher the amount of loan that can be granted. Additionally, reverse mortgage is the only debt that can be secured against the property.
On the contrary, in “forward mortgage”, the money owned proportionately goes up with the equity. In place of monthly payments, the money borrowed is being added up with interest which lowers your equity. If the loan payment term is set for a long time, when the mortgage becomes payable, there will be a big amount that has to be settled. Additionally, if the value of the property decreases, then it could be that there will not be nor equity left to speak of. On the other hand, if the value of the property increases. The equity could increase, unfortunately this happens very rarely.
More than anything else, a reverse mortgage gives you peace of mind by allowing you to maintain your independence. Reverse mortgage products are, designed to allow seniors to maintain their independence with dignity. A reverse mortgage allows you to use the equity in your home to maintain and even improve your lifestyle. A reverse mortgage will NOT cause you to lose your home and I have used a reverse mortgage many times to give seniors the ability to stay in their home when other alternatives have failed. Funds made available to you are not taxable and will not affect your Medicare eligibility. They can be an effective estate and financial planning tool that can be shown to increase the size of your estate as well as to reduce estate taxes. They require no income, credit score, or health qualification but are based on your age and the equity in your home.
There are several types available to you and one may be a better choice depending on your specific set of circumstances:
- Fixed rate Home Equity Conversion Mortgage. From the Federal Housing Administration (FHA)
- Adjustable rate Home Equity Conversion Mortgage. From the Federal Housing Administration (FHA)
- Home Keeper. From Fannie Mae
- Cash Account Advantage. From Financial Freedom
When choosing a way to get money from a reverse mortgage, you can find only a little option, by one lump payment or regular monthly advances or a credit account. The condition for this type of mortgage requires immediate settlement of the loan. The mortgage will become immediately payable when the borrower passes away, disposes of the property or transfers residence.
Updated property taxes payments and insurance are also required. The lending company has the option to pay for these but the amount will be applied to your advances. It is important for you to read all the stipulations of the contract that will give your lender grounds to make the loan immediately payable.