By Charles Park on January 20, 2010
A reverse mortgage, reverse annuity mortgage, or home equity conversion is unlike a traditional mortgage that finances a real estate purchase which generally consists of a loan and a repayment plan. It is designed for those, usually senior citizens, who own their homes and wish to continue living there but face difficulty in doing so.
This special type of home loan lets you convert portions of your home equity into cash. In contrast to a home equity loan or a second mortgage, there is no need for repayment until the home is no longer the primary residence of the mortgagee. The amount you can borrow is dependent on your age, current interest rate, appraised value of your home, etc. Like all other homeowners, real estate taxes, insurance, and other payments such as utilities are still required.
In terms of eligibility, all borrowers must be at least 62 years of age for most reverse mortgages. All owners of the home need to apply for the reverse mortgage and sign the loan documents. The home must be the principal residence of the borrowers. Single family one-unit dwellings are all eligible. Some arrangements also accept 2-4 unit dwellings along with some condominiums, cooperatives, planned unit developments, etc. Mobile homes are ineligible in general.
A popular version of reverse mortgage is the lifetime reverse mortgage; as long as the borrower remains in the house, he or she can receive monthly payments from the lender. When the borrower passes away and the house is sold, the lender receives a return of principal, interest, and part or all of the appreciation value. This is also the case if the borrower decides to sell the home or permanently move away.
Some reverse mortgages are available through the state and local government. These usually have low fees and low interest rates but are often restrictive in its use such as for property taxes or home repairs. Private mortgages are usually costly but the restrictions on usage are absent.
Most homeowners can receive a relatively large cash advance from the federally insured Home Equity Conversion Mortgage (HECM). As an FHA loan option, this particular loan is generally less expensive than private loans but have specific terms for eligibility. |