Reverse Mortgage : know the facts now

Reverse mortgages are rapidly becoming the preferred financial planning tool of cash-strapped homeowners. Reverse Mortgage was introduced in 1989 to enable seniors age 62 and older to convert the equity in their home into cash without having to move or sell their home.

We’ve put together some of the reverse mortgage basics here. So, take a look at them.

1.      How does reverse mortgage work?

The lender makes payments to the homeowner based on a percentage of accumulated home equity. The homeowner can draw money from three options: a monthly payment or opt for a lump sum of cash or a line of credit account from which they can draw money when they need it. Homeowners can also opt for or a combination of the three potions mentioned above to draw money.

2.      What does the term “reverse” refer to?

The term "reverse" is used because here the borrower doesn’t make a monthly payment to the lender, instead, the lender makes payments to the borrower.

3.      When does the money need to be repaid?

The money need not be repaid until the borrower dies or sells or permanently leaves his/her home permanently, or in some cases after a fixed number of years passes.

4.      What is FHA’s HECM reverse mortgage?

HECM stands for The Home Equity Conversion Mortgage (HECM). It is FHA's reverse mortgage program which enables older homeowners to withdraw a portion of the equity in their home.

5.      Who is eligible for FHA’s HECM reverse mortgage?

Homeowners 62 years of age or older, who own the home outright, or have small mortgage balances that can be paid off at closing with proceeds from the reverse loan, and, the borrower must live in the home.

The borrower is also required to understand the basics of reverse mortgage from a HECM counselor prior to applying for the loan.

6.      Are there restrictions on how the money can be used?

No, the money can be used for any reason. However, it is advisable to use the cash to supplement income, pay for health care expenses, pay off debt or use the money for college financing.

7.      How much money can the borrower get from his/her home?

The amount that can be borrowed depends on

Age of the homeowner

The current interest rate

The appraised value of home

Mortgage balance

FHA's mortgage limits for the area where the property is located

Also, one can use an online reverse mortgage calculator to get an idea of what they may be able to borrow.