HED Reverse Mortgages
More and more these days, seniors who have substantial equity in their homes, but who are nonetheless cash-poor, are turning to reverse mortgages to supplement their retirement savings. A reverse mortgage may provide a lump sum payment to the homeowner/borrower, or it may make periodic payments or set up a line of credit -- or a combination of the three. The loan balance increases with interest and periodic payments over time, causing negative amortization (an increase in the outstanding balance of the loan). The loan is secured by real property, and is repaid from proceeds from the future sale of the home, but the borrower is generally not personally liable.
To qualify for a reverse mortgage, a homeowner must be 62 years old or older and must have home equity, and the home must meet minimum property standards set by the
The lender determines the size of a loan based on equity, the borrower's age (and that of a co-owner, if applicable), current interest rates, and the type of program selected. As long as the borrower maintains the home and pays the property taxes and insurance premiums, he or she retains ownership. The loan doesn't have to be repaid until the homeowner dies, sells the property or lives elsewhere for 12 months. When the home is sold, the borrower (or estate) pays off the loan plus interest. Any equity left it is paid to the owner or heirs. As long as the property is sold at a fair market price, even if it is less than the loan balance, the lender cannot claim more than the sale amount received.
Most reverse mortgages are insured through the
Borrowers can select either a fixed-rate or adjustable-rate mortgage. With a fixed-rate mortgage, the borrower must take all the money in a lump sum, and interest accrues immediately. You should consider this type of mortgage only if you need access to all the equity immediately. Some lenders waive or reduce initial costs such as loan origination and/or servicing fees for this type of loan. Therefore, it pays to comparison shop.
With adjustable-rate mortgages, the interest rate may change every month. Rates will vary over the life of the loan, and can rise substantially. So it is important to review the history of the underlying index. The advantage of this option is that a borrower can use multiple lump sums, regular monthly payments, or a credit line to use at his or her convenience. The major disadvantage is that future interest costs are not known, so increases in rates can jeopardize the borrower's access to additional funds that may be needed to maintain the property and continue to pay real estate taxes and insurance.
Most experts agree that other options should be considered first, and that reverse mortgages make more sense for borrowers in their 70s or older, rather than in their 60s. Next week I will discuss other options, sources of information, and provide examples of the costs of reverse mortgages.
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Real Estate - HED Reverse Mortgages
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