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A reverse mortgage is a financial product for people of age 62 and above who are homeowners.
They can use their property to mortgage to a financial institution and in return financial institution will pay the monthly instalment to the homeowner and after the death of the senior citizen the property will be acquired and sold by the financial institution in order to recover their investment and the excess money is given to the legal heir of the property.
However, the property owner should reside in the home that is reverse mortgaged and should pay the property taxes. A reverse mortgage is also called Home Equity Conversion Mortgage (HECM).
Meaning of Reverse Mortgage
When people think about their post-retirement life, the one thing that worries them most is the monthly income and financial support. Most senior citizens have their home in their name.
Because of the lack of knowledge, they make the mistake of transferring their property in the names of their children in order to get support from them when they do not have a steady income or they no longer be able to take care of themselves.
Reverse Mortgage financial product is introduced to provide regular income to senior citizens and to make them independent in their old age.
The elders are not required to pay any mortgage payments on a reverse mortgage. The amount of loan balance can exceed the value of a home, especially when the homeowner lives in the home for a long period of time or when the value of home keeps declining.
However, the benefiter is not liable to pay the exceeding amount. Federal regulations structure the transactions in such a way so that the loan value does not exceed the value of the home.
A reverse mortgage provides much-needed cash to elderly people when they need it the most and when their only property owned by them is their home.
The value on a reverse mortgage can be received in the following ways
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#1 Equal Monthly Payments:
The borrower will receive steady payment as long as he is alive or living in the home he mortgaged.
#2 Lump Sum:
Receive the whole amount at once. This method will get you a steady fixed interest rate.
#3 Line of credit:
The borrower can receive the money that he needs, and the interest will be charged only on the money that he takes.
#4 Term Payment:
The borrower will receive the decided amount of payment for a fixed period of time, such as ten years or 15 years.
#5 Term Payments Plus a Line of Credit:
The borrower will receive a fixed amount of money for a fixed period of time, and if he needs more money than a line of credit can be accessed.
#6 Equal Monthly payments Plus Line of Credit:
The borrower will receive money as long as he is alive and lives in the home as a primary resident of the home and in between if he needs more money he can borrow money on Line of Credit.
It is normal to confuse reverse mortgage with a line of credit or home equity loan because a reverse mortgage can also provide your lump sum or line of credit on the basis of the market value of your home.
But neither you need to show steady income to be able to qualify for a reverse mortgage like other home equity loans, nor you need to pay regular loan payments to remain the primary owner of the home.
Therefore, a reverse mortgage is a good option for senior citizens who cannot qualify for a home equity loan because of the lack of steady income.
There are certain rules that one must keep in mind while applying for a reverse mortgage loan.
- The applicant should be at least 62 years old or above.
- He or she should either be the sole owner of the property or at least have a 50% share in the property.
- He or she must pay property taxes, interest, up-front insurance premium, loan servicing fees, and ongoing mortgage insurance premiums.
- Depending on the condition, the amount charged from the borrower can be limited by the financial institution.
- The lender can’t ask the property owners or his heir to pay when the money lent to the borrower increases the value of the home.
- The heir of the property has first right to own the home by paying back the loan amount, or the property would be sold to obtain the money paid and if the price of the property sold is more than the loan amount the excessive amount will be given to the right heir of the property.
- The property owner is required to pay the property taxes and insurance instalments on time and maintain the home using regular repair.
Examples of Reverse mortgage
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Let us understand Reverse Mortgage with the example of Mr. and Mrs. Graham. Mr. and Mrs. Graham owns a home worth $500,000 located in Settle. They both are of the age of 65 and 60 respectively. They decide to apply for a reverse mortgage as they need steady as they both are retired from their respective jobs.
After consulting with the bank, they get a loan of $100,000 for 15 years which will pay them $1000 a month.
At the age of 80, Mr. Graham passes away while his wife still lives in the hope that they put for a reverse mortgage. The tenure of the reverse mortgage has passed the decided time period.
At this point, Mrs. Graham can pay off the loan to keep the property, or she can sell the home whose current worth is $10,00,000 to pay the debt and keep the difference. As Mrs. Graham does not have $100,000, she decides to sell the property t pay the debt and receive the difference to living her life afterward.
If in case Mrs. Graham was passed away too before paying back the loan amount to the bank, then the bank will legally be the owner of the home.
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