As the Baby Boomers begin to retire, many are moving from the homes the made their families with to smaller, more manageable homes in more panoramic locations, such along a golf-course or lake-front property. Many seniors reinvest the sales money from their old homes back into their new home, and some will look into a small, short-term mortgage to help build additional equity into their homes.
Unfortunately, seniors sometimes run into unexpected circumstances, such as illness, disability or death. This can force them into looking for alternate financing to help them get through this difficult period. A reverse mortgage is one way they can ensure that they do not lose their property. This type of loan releases the equity in the homeowner?s property in payments or a lump sum and payment on the home loan is deferred until the owner?s death, they have to leave into aged care, or the house is sold.
Reverse mortgages have certain requirement that must be met in order to qualify. The borrower must be at least sixty-two years old. There is no minimum income or credit requirements, the money can be used for any purpose, and applicants must seek free financial counseling with HUD to safeguard the borrower and their family to ensure that they know what the loan is. The borrower must pay off any existing mortgage(s) with the proceeds of the reverse mortgage.
Five factors determine how much money an applicant will receive when they qualify for a revered mortgage. Of course, the first factor is the appraised value of the property, whether any health or safety repairs need to be made to the house, and whether there are any existing liens on the house. The interest rate, as determined by the U.S. Treasury 10 year T-Bill or the LIBOR index, is the next factor. The age of the applicant is the next factor. The older the applicant, the more money they receive. The lender subtracts the applicants age from 100 and divides the maximum loan amount by the difference. How the payment is taken is another factor. A line of credit will maximize the money available. A lump sum payout issues cash immediately, but have the highest interest raite. And lastly, the location of the property and whether or not the loan amount is subject to the maximum loan limits. However much the applicant receives, it will not affect Medicare or Social Security benefits and it is not taxable.
A reverse mortgage loan ends when the homeowner dies, sells the house, or, depending on the loan conditions, moves out of the house for 12 consecutive months (for example, to go into an assisted living home). At that point, the reverse mortgage can be paid off with the proceeds of the sale of the house, or be refinanced by the heirs of the homeowner's estate. In situations where the proceeds are not sufficient to pay off the loan, then the bank absorbs the difference.
Something applicants need to keep in mind when considering a reverse mortgage is that in some cases the mortgages can cost more in interest than a conventional loan. Property owners need to do their homework and find the best solution for their particular situation.