A reverse mortgage can help provide financial security to the elderly in their retirement years. It is one way to borrow against your home. Generally, the older you are, the more you get; and the more your home is worth, the more cash you get. The loan can be taken in a lump sum, as monthly payments, as a line of credit or a combination of these options. When the borrower dies, sells the home or moves out permanently, the heir will have to repay the loan, principal plus interest-most likely by selling the property.
Here are some reverse mortgage basics:
Who is eligible? You must be 62 years old and own your home, which must be your primary residence. There are no income requirements as the loan is secured by the home. You remain responsible for making property repairs, paying your property taxes, and home-owner insurance.
What is the process? You need an appraisal and inspection just like you do for a traditional mortgage. If you take out a government loan, counseling is mandatory.
What are the loan options? There are two types of loans: the Home Equity Conversion Mortgage (HECM) and private reverse mortgage without federal mortgage insurance. HECM loans are insured by the US government; with a private loan, the lenders assume the risk.
The main drawback of a HECM loan is that the Federal Housing Authority caps the appraisal, which affects the loan amount. Typically, the HECM loan would give about 45 percent of the home value, while the private reverse mortgage give up to 65 percent. The amount owed to the bank will never exceed the value of the home.
How much can you get? It depends on the home's value, location, interest rates, and the age of the younger borrower if there are co-owners. Expect to get between 50 and 70 percent of the appraisal price of your home.
The closing costs such as appraisal and legal fees, origination fee, mortgage insurance premium and monthly service fees which you can roll into the loan are to be paid up front.
