08/10/2010 A reverse mortgage is a unique type of mortgage home loan that allows homeowners to access their home equity either in the form of a single lump payment or through scheduled installments paid out by the lending institution over a set period of time. A reverse mortgage is preferable to a home sale when the homeowner plans to continue living in the house but wishes to utilize the equity of the property as income. As a result, a reverse mortgage is a highly specialized financial instrument with unique characteristics.
The following list outlines some of these characteristics.
1. In order to qualify for a reverse mortgage, the homeowner must be over the age of 62.
2. All other mortgages on the property must be paid off either before the reverse mortgage is taken out or at the outset of the reverse mortgage, using either personal funds or capital from the reverse mortgage itself.
3. A reverse mortgage constitutes a lien on the property. The homeowners does not pay interest month by month. Rather, the loan interest is added to the lien amount as it occurs.
4. The homeowner may remain in the house as long as he or she wishes, even after the full equity of the house has been paid out. The legal ownership of the house does not change.
5. When the homeowner dies, ownership of the house passes to the homeowner's heirs. The bank or lender does not gain ownership of the house.
6. The loan amount becomes due when the homeowner sells the house, moves out of the house for longer than 12 consecutive months, or dies.
7. The homeowner's heirs are responsible for the house and the loan. They can refinance the loan and pay it back if they wish to keep the house, or they can sell the house and use the proceeds to pay back the loan.
8. A reverse mortgage is a non-recourse loan. The maximum amount that the lender can collect back from the loan is equivalent to the maximum value of the collateral, the home, at the time of collection.
9. Depending on the homeowner's area of residence, there may be limits as to how much equity can be accessed through a reverse mortgage. In 2009, the limit was raised to $625,000.
10. It is possible to take out a second, third, or fourth reverse mortgage if the value of the property increases significantly enough.
11. Homeowners who wish to utilize a reverse mortgage must attend counseling with a third party financial counselor. This is required due to the unique and specialized nature of reverse mortgages.
12. Many conventional mortgage lenders provide reverse mortgages, but there is such a thing as a FHA reverse mortgage as well. Compare mortgage rates between lenders before selecting one to work with.
