What is a reverse mortgage?

Reverse mortgage

According to a study conducted in August 2014 by Merrill Lynch, when it comes to homeowners, older people tend to have less mortgage debt, have more equity in their homes, and tend to have a higher net worth . These trends make older Americans a favorable destination for sellers of financial products and services, including reverse mortgages. These mortgages allow borrowers 62 or more years to realize the value of their homes.They can be a useful financial tool, but they are not without risk. If you are considering a reverse mortgage or know someone who is, it is important to understand how reverse mortgages work and the advantages and disadvantages that might face.

What is a reverse mortgage?

A reverse mortgage is a loan or a credit line that allows ages 62 years or older homeowners borrow money back years of equity they have built in their homes.The Federal Housing Administration (FHA) insures mortgages reverse more, and these can also be called Equity Conversion Mortgage (HECM).

How do reverse mortgages work?

The main attraction of a reverse mortgage is no mortgage principal or interest payments monthly obligation. The homeowner must continue to pay taxes and insurance on the home or the risk of default of the reverse mortgage. Interest that accrues on the loan is added to the loan balance and the loan is deferred until the borrower dies, sells the home or moves out. Money can be taken in a lump sum or distributed monthly.When HECM began in 1989, the typical consumer to take this type of loan was a retiree looking for additional monthly cash flow during retirement.In recent years, however, as a result of a number of factors, including the rising cost of living, increased financial hardship, and increased medical costs, many seniors have chosen to make their payments as capital. Doing so means that older people are basically taking advantage of all its early heritage and depleting the value of wealth built through his house.

Pros and cons of reverse mortgages

Before you decide to take out a reverse mortgage, consider the following:

1. There’s a financial assessment requirement

 
HUD has rules that require financial evaluation before a borrower can avail equity. Things like a credit check, review of the debt and equity analysis helps ensure that qualified borrowers have the ability to pay its current debts, taxes and property insurance, and other expenses. This means that even if you have equity in your home, you may not be eligible for a reverse mortgage.

2. Your spouse may not have to be a borrower.

  
Many homeowners senior living with their spouses at home, and that the spouse can not be a borrower on the loan. Until recently, in the case of death of the borrower, the surviving spouse had to repay the loan or the risk of losing the home to foreclosure. Recent regulations make it easier for the surviving spouse to stay home after the death of a spouse debt, but only if he or she meets certain requirements.

3. There are limits on payouts.

  
reverse mortgage payments vary depending on the age of the borrower, the appraised value of the house, and interest rates. The maximum value of the house that can be used to calculate the value of the reverse mortgage is $ 625,000, even if your home for more value. This is a limit set by the government. In recent years, the new rules also limit the amount that can be extracted in the first year, along with limits on the total percentage of total capital to be drawn in general. Your lender and housing counselor can work with you to calculate your specific scenarios and eligible amounts if you are considering a reverse mortgage.