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Reverse Mortgage Basics

A reverse mortgage is a loan against your home that you don't have to replay as long as you live there. In a regular or so-call forward mortgage, your monthly loan repayments make your debt go down over time until you've paid it all off. Meanwhile, your equity is rising as you repay your mortgage and as your property value appreciates.

With a reverse mortgage, conversely, the lender sends you money and your debt grows larger and larger as you keep getting cash advances, make no repayment, and interest is added to the loan balance (the amount you owe). That's why reverse mortgages are called rising debt, falling equity loans. As your debt (the amount you owe) grows larger, your equity (that is, your home's value minus any debt against it) generally gets smaller.

Reverse mortgages are different from regular home mortgages in two important respects:

• To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don't have to make monthly repayments. Thus, your income generally has nothing to do with getting a loan or determining the amount of loans.
• With most home loans, you can lose your home if you fail to make your monthly repayments. With a reverse mortgage, however, you can't lose your home by failing to make monthly loan payments because you don't have any to make.

Good reverse mortgages merit your consideration if they fit your circumstances. A good reverse mortgage allows you to cost-effectively tap your home's equity and enhance your retirement income. If you have bills to pay, want to buy some new carpeting, need to paint your home, or simply feel like eating out and traveling more, a good reverse mortgage may be your salvation.

The amount a homeowner can borrower will depend on their age, current interest rates, and appraised value of their home (or FHA mortgage limits for their area). As a general rule, the more valuable your home is, the older you are, the lower the interest rate, the more you can borrow.

Reverse Mortgage Requirements

Borrower Requirements:

• You are 62 years of age or older (if you have a co-borrower, they must be 62 years or older also)
• You own your property
• Occupy your property as primary residence
• Participate in a consumer information session given by an approved HECM counselor

Financial Requirements

• No income or credit qualifications are required of the borrower
• No repayment as long as the property is the primary residence
• Closing costs may be financed in the mortgage

Property Requirements

• Single family home or a 1-4 home unit with one of them occupied by the borrower
• HUD-approved condominiums
• Manufactured homes and leased land
• Meet FHA property standards and flood requirements

How you get your money

Monthly: Most people need monthly income to live on. Thus, a commonly selected reverse mortgage option is monthly payments. However, not all monthly payment options are created equal. Some reverse mortgage programs commit to a particular monthly payment for a preset number of year. Other programs make payments as long as you continue living in your home or for life. Not surprisingly, if you select a reverse mortgage program that pays you over a longer period of time you'll generally receive less monthly- probably a good deal less than from a program that pays you for a fixed number of years.

Line of Credit: Rather than receiving a monthly check, you can simply create a line of credit from which you draw money by writing a check whenever you need income. Because interest doesn't start accumulating on a loan until you actually borrow money, the advantage of credit line is that you only pay for the money you need and use. If you have fluctuation and irregular needs for additional money, a line of credit may be for you. The size of the line of credit is either set at the time you close on your reverse mortgage loan or may increase over time.

Lump sum: The third, and generally least beneficial, type of reverse mortgage is the lump-sum option. When you close on this type of reverse mortgage, you receive a check for the entire amount that you were approved to borrow. Lump-sum payouts usually only make sense if you have an immediate need for a substantial amount of cash for specific purpose such as making a cash gift to your family, making a major purchase, or paying off an existing or delinquent mortgage debt to keep from losing your home to foreclosure.

Mix and match: Perhaps you need a large chunk of money soon for some purchases you've been putting off, but you also want the security of a regular monthly income. You can usually put together combination of preceding three programs. Some reverse mortgage lenders even allow you to alter the payment structure as time goes on. Not all reverse mortgage programs offer all the combinations, so shop around even more if you're interested in mixing and matching your payment options.

What about repayment?

With a reverse mortgage, you do not need to repay the loan as long as the home is the borrower's principal residence. A lender will recover their principal and interest when the hold is sold. The remaining value will go to the homeowner or to their heirs. Furthermore, you can never owe more than the value of your home.
In the case that the property value goes down since the reverse mortgage was taken and sales proceeds are insufficient to pay off the loan, HUD will pay the deficit. The Federal Housing Administration (FHA) collects insurance premiums from borrowers to provide this coverage.

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