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REVERSE MORTGAGE

© Whitni Smith

A Reverse Mortgage is a special product that was created to assist older consumers who are living on a fixed income. It is a mortgage for older owners (typically over 62 years old) who have substantial equity in their home. The basis of the program is to provide cash for the elderly to live off of, while still maintaining ownership of their home.

EQUITY LOAN OR REVERSE MORTGAGE? The main difference between a straight equity loan and a reverse mortgage is that the borrower does not have to make any payments on a reverse mortgage. In fact, the borrower does not even need income to qualify for a reverse mortgage. The loan is granted purely based on the equity on the home and the age of the borrower. An Equity loan does have regular payments and the borrower has to be qualified to handle the extra debt.

HOW DOES A REVERSE MORTGAGE WORK? A reverse mortgage is a mortgage where the borrower cashes in the equity of their home. The borrower retains all ownership of the home. The borrower is still responsible for maintaining the home, property taxes, insurance, etc. Instead of making payments, the interest that is charged on the loan is simply added to the balance. This means that the payoff amount on a reverse mortgage will be substantially higher than the amount that was initially borrowed.

The borrower on a reverse mortgage can choose to take a lump sum amount, a set amount on a monthly basis or on a draw basis. The draw basis works like a line of credit. The borrower withdraws funds as needed. There can be fees associated with this type of structure. Most reverse mortgage programs allow for the borrower to change the structure of how they take their funds as their needs change.

The loan is due in full once the borrower dies, moves or goes into a retirement home. In case of death, the home is still passed on to the heirs, however, the heirs must refinance it or sell the property in order to pay the debt.

HUD'S REVERSE MORTGAGE PROGRAM HUD has a reverse mortgage program that states that if the home sales for less than the amount owed on the mortgage, HUD will pay the mortgage company the difference. HUD charges an insurance premium to their borrowers to provide this coverage. HUD charges two points plus a half point each year for this coverage. This amount is normally paid by the lender but charged to the borrower's principal balance. In other words, it is added to the payoff amount of the loan. Due to this insurance, HUD has one of the better priced reverse mortgage products.