A Home Equity Conversion Mortgage (HECM), one type of reverse mortgage loan backed by FHA, provides qualified homeowners with the ability to convert their home equity into cash all without monthly mortgage payments.
The intention is to encourage homeownership and financial independence. These loans are insured by the Federal Government’s Department of Housing and Urban Development
Seniors age 62 and older have the ability to take out a reverse mortgage loan in order to supplement their retirement income. Since the late 1980’s these loans have grown very popular among the Baby Boomer generation as a source of alternative income. However, there are some things you need to consider first.
A reverse mortgage provides an alternative source of income that you can get from your own home. Before reverse mortgages were available, you had to sell your home or use it as collateral for a loan with monthly payments. Reverse mortgages do not require you to pay the loan amount while you are still residing in your home.
Instead, the loan is repaid when the borrowers pass away, sell the house, or make a permanent move. The lender then has the option of paying out the loan in either monthly payouts, a lump sum, or a line of credit.
Reverse Mortgage Tips
Lenders typically have additional costs for their services that include an origination fee, closing costs and a mortgage insurance premium. You should discuss these costs right away to clarify any inconsistencies and avoid miscommunications.
As your interest is charged on the outstanding amount each month, the balance of the loan will gradually increase over time. Again, payments on your loan are deferred until a later time so you can sit back and let your home make you money!
Reverse mortgage loans may have either a fixed or variable interest. Fixed interest rates are often popular because they eliminate the risk of their rate increasing. However this doesn’t necessarily mean it’s the right kind of interest rate for you. For instance, borrowers with a fixed rate are required to receive their funds in a lump sum. Borrowers with variable interest rates on the other hand have the ability to choose between several disbursement options.
While reverse home mortgages can potentially use all of your home equity, you are only responsible for repaying the value of your home. In order to prevent borrowers or heirs from owing more than their home is worth, the majority of reverse mortgage loans have a non-recourse clause.
“Reverse mortgages do not require you to pay the loan amount while you are still residing in your home. Instead, the loan is repaid when the borrowers pass away, sell the house, or make a permanent move.”