The US population is aging, and as it does, older Americans want to age in their homes but need to access the equity for home improvement or other bills. Reverse mortgages were created as a way to convert a portion of an owners home equity into cash. While it is similar to a home equity loan, no monthly payment is required until the borrower no longer lives in the home as a primary residence or fails to meets the obligations of the mortgage (i.e. paying taxes). It’s important to know more about reverse mortgages in order to determine it is an option for you.
Major points to considered are:
Eligibility: If you are 62 years or older and own your own home you can apply for a reverse mortgage.
How Interest Works: The interest rates charged frequently variable in nature and are based n variable interest rate such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin of one to three percentage points. The proceeds received do not contain interest but the interest is compounded over the life of the loan and is paid when the loan is repaid. Borrowers are charged interest only on the proceeds that are received.
How the Fees Work: Similar to all loans there will be fees. The fees will fall into two categories, loan origination fees and monthly service charge fees. While the upfront fees can be added on to the loan amount owed, the monthly service will be deducted from what cash is available to you. This monthly fee is referred to as The Servicing Fee Set Aside (SFSA) and is determined at loan closing. The loan servicer is owed this money and will deduct it each month or as disclosed based on their policies.
How Payments Work: Payments are made to the borrowers from the bank. Borrowers can choose from a lump sum, a fixed monthly payment or a line of credit. Borrowers can choose a combination of these options.
How to pay back a reverse mortgage: Unlike a standard mortgage no monthly payments are due on a reverse mortgage while it is outstanding. The loan is due and payable upon sale of the home, when it is no longer occupied as a principal residence, death of the borrower (the last remaining spouse, in cases of couples), or borrower permanently move out. The loan amount plus compounded interest (amount owed) can never exceed the value of your home. When the home is sold the loan is paid off and any excess proceeds will go to the estate.
How to Find a Lender: These are specialized loans and it is necessary to find a lender that understands the risks and reward of these loans. Not all lenders offer reverse mortgages you will need to shop lenders to get rates and fees. Use the HUD site for more information
The National Council on Aging can offer more advice and information. Call them at (800) 510-0301 or download their free booklet, “Use Your Home to Stay at Home.“