A reverse mortgage is a special type of insured loan that allows the elderly (more than 62 years age) to borrow against the equity in their home. It helps them to withdraw tax free cash from their homes, while retaining the right to live there till they want, without any monthly interest or principal payments. They are not required to pay back the loan till the time they stay in the property, provided they pay all the house tax, insurance premiums and other utility bills.
A reverse mortgage is a loan available to homeowners who are having age of more than 62 years which helps them to convert part of the equity in their home into cash.
Key characteristics of a Reverse Mortgage:
All borrowers listed on title must be of 62 years old or more
The borrower must reside in the property which is used as a collateral. Other investment properties cannot be used here
Proceeds from the reverse mortgage can be used for daily expenses, repairmen, medical cost, home care cost,
Home must be the primary lien in a reverse mortgage and any existing mortgage must be repaid using the proceeds from the reverse mortgage.
The borrower should pay the property tax, insurance premium and other utility bills. Also borrowers are responsible for all necessary repairment of the property
Loans must be repaid fully when the borrower dies or leaves or sells the property
Types of Reverse Mortgage:
Single purpose Reverse Mortgage: These are usually low-cost loans provided by some state and local government entities to people with only low or moderate incomes. The purpose are mostly home repairs, emergency cost or property taxes
HECM (Home Equity Conversion Mortgage): This most popular type of reverse mortgage allows senior citizens to convert the equity on their home into cash based on the appraised value of the property. It is regulated by the U.S. Department of Housing and Urban Development and loan money can be received as a credit line or monthly installment or a combination of these or a lump sum. HECMs are the most popular type of reverse mortgage and account for 95% of reverse mortgages.
Proprietary reverse mortgage: These loans are designed to help owners of high value homes to access greater amounts of their home equity compared to the equity value available from the government insured HECM reverse mortgages. These are also called Jumbo reverse mortgages because of their high values.
Difference between conventional mortgage and reverse mortgage:
Reverse mortgage is only for people with age more than 62 years while conventional is for everyone except senior citizens
Reverse mortgage is used to generate cash from one’s home in order to meet daily expenses while conventional mortgage is used to buy or refinance a house property
Unlike conventional mortgage in case for reverse mortgage, homeowners are not required to pay any monthly installment for Principal or Interest payments
For reverse mortgage, with every month the home owner’s equity decreases while for conventional mortgage in increases every month with monthly installment payment
Unlike conventional mortgage, reverse mortgage is insured by federal government.