Reverse Mortgage
Reverse mortgage” is a term we seem to hear more of today. Created for senior adults aged 62 and older, a reverse mortgage (also known as a Home Equity Conversion Mortgage) allows a homeowner to cash out a portion of the equity in their home. Borrowers can elect to receive their funds on a monthly basis or in a lump sum, depending upon the loan type. According to Reversemortgage.org, the amount received depends upon factors that include the age of the homeowner(s), appraisal value of the home and current interest rates.
A reverse mortgage can be a supplemental income source for senior adults, allowing homeowners to liquidize home equity with the promise of no monthly mortgage payments. Reverse mortgages often are used to cover general living expenses, home renovations, medical bills and even to pay off an existing mortgage.
The balance of a reverse mortgage loan is paid when the last surviving homeowner vacates the property or passes away, and the heirs sell the home. The proceeds of the sale are then used to repay the balance of the reverse mortgage, and any remaining equity is passed on to the homeowner’s heirs.
Key Factors of a Reverse Mortgage
1. Insured by the Federal Housing Authority
2. Issued by a mortgage lender
3. Applicants must attend credit counseling
4. Minimum age requirement is 62 (youngest borrower)
5. Property must be primary residence
6. No monthly mortgage payments
7. Utilizes a property’s equity as loan collateral
8. Structured as a refinance or new purchase loan
9. Fixed and adjustable rates available
10. Taxes, property insurance and HOA fees paid by borrower
11. Condition of property must be maintained
12.Must be the only lien on the property
Interest accrues (compounds) throughout the life of the loan
Interest paid only on amount received (at repayment)
The Closing Process for a Reverse Mortgage
Closing on a reverse mortgage varies a bit from traditional real estate settlement. In place of the Closing Disclosure (CD) Form, a HUD Settlement Statement is used to itemize fees and other details pertinent to this form of loan. Mortgage Insurance Premium (MIP) is 2% of the home’s appraisal value or FHA lending limit ($679,650), whichever is less. Servicing fee set-aside is processed during closing, deducted from the proceeds of the loan and used to cover anticipated costs of servicing the loan throughout amortization. Remaining closing fees are generally comparable to those standard to any other type of mortgage, and vary by lender; however, additional fees and documentation may also apply
