Reverse Mortgages - What Is A Reverse Mortgage?

Reverse mortgages often sound seductive. After all, if you pay a monthly premium plus interest to the lender in a traditional mortgage, then a reverse mortgage must pay you premium plus interest. Unfortunately, this is not an accurate definition of a reverse home loan, and the seemingly strange title for this type of home mortgage is one of the reasons why many people find the topic confusing.

What Is a Reverse Mortgage Loan?

The term reverse mortgage refers to a specific lending program that the Federal Housing Administration (FHA) supports. The program is available for consumers over 62 years of age, and it allows them to borrow against the equity of their homes. Under the provisions of the program, the borrowed money is not due until after the death of the last borrower who signed the contract.

Reverse Mortgage Eligibility

Before you explore these home loans, you need to ask yourself, "Do I qualify for a reverse mortgage?" Your age and your home's equity are the main reverse mortgage requirements, but the following factors can also determine whether you qualify for a reverse home loan:

• FHA lending limits. This amount changes depending on the information the organization gathers about your home or property. The FHA will only allow you to borrow a percentage of the equity in your home, with a maximum value of $625,000.


• An FHA appraisal of your home. An FHA appraiser will determine the value of your home based on an inspection. In some cases, an appraiser may use collected data for the appraisal rather than an on-site inspection.


• Your age. The older you are, the more you can borrow with this type of FHA loan.


• Existing loans. In some situations, you can qualify for a reverse mortgage loan if you still owe a lender on your first mortgage. In almost all cases, you must apply the reverse mortgage to the outstanding debt on the traditional mortgage before you can use it at your discretion. You can use a mortgage calculator to determine how much you have remaining on the first loan.


• The use of the home. The borrower must use the property as a primary residence.


• The type of house. The FHA only supports reverse mortgages for certain types of homes. You may be eligible for a reverse home loan if you live in a single-family home, a one- to four-unit home, a HUD-approved condominium, or a manufactured home that meets FHA standards.


• Property leans. You cannot get a reverse mortgage if you owe taxes or other debts to the U.S. Government.

Join the best Facebook page for home improvement advice, tips & more!

The Benefits of a Reverse Mortgage

Some people wonder about reverse mortgage vs. second mortgage. For senior citizens, the reverse mortgage is usually a better option. Here are some of the benefits you'll get with a reverse home loan.

The biggest benefit of a reverse mortgage is that you will not have to pay back the loan while you are alive and living in the house. The estate will need to repay the money upon the sale of your home or upon the death of the last borrower on the signed contract. The FHA ensures that the estate will not have to repay any balance that remains on the home loan if the estate sells the home to cover the debt after the borrower dies, and the bank cannot come after your children or heirs for any outstanding balance.

For many people, a reverse loan can provide the means to pay off a traditional house loan. This works well for individuals who have a small amount left to pay on the original loan. This might allow a person to retire, or it can be a way for homeowners to stay in their homes if they get sick or lose a job.

Another benefit is that you don't need to have good credit for a reverse mortgage. Since you won't be repaying the loan, your home's equity replaces the role of your credit score. A reverse home loan may be the only type of mortgage you can get. Additionally, you can get a reverse home loan without showing proof of income.

Finally, reverse mortgage home loans can turn houses back into individual investments instead of inheritances. If you own your home, it has no liquid asset properties. It might be worth a large sum of money if you sell it; however, it isn't worth anything if your plan is just to live in the home. You cannot buy groceries with part of it or use a section to finance your around-the-world retirement adventure. A reverse mortgage takes some of the value of your house and lets you do what you want to do.

The Cons of a Reverse Mortgage

The biggest drawback to a reverse mortgage is that someone will have to pay off the loan after your death. If your heirs want to keep the house within the family, they must pay off the debt in full — regardless of market value — in a very short time after you are no longer occupying the property.

Another downside is that you must continually live in the house. The FHA requires the estate to repay the loan if the borrower has not lived in the house for the past 12 months. This may be a problem if a person must move to a nursing home or an assisted living facility. If your spouse is not a signer on the home loan, he or she will have to repay the loan after your death in order to stay in the home.

Even though you will not have to make a payment on the reverse mortgage, interest will still accrue. This could lead to a smaller inheritance for your family then you originally factored. A loan of $100,000 at 5 percent APR will accumulate $5,000 in interest in the first year.

Additionally, your estate will have to pay fees associated with the home loan. As you won't have a monthly mortgage payment, the reverse mortgage lender will add these to the amount the estate must repay.

Is a Reverse Mortgage Right for You?

Weigh all your options before deciding what type of loan is the best for you. The cost of an unbiased financial adviser may be a prudent expenditure. Be sure to ask about all of the fees costs for any loan you are considering. For more information on home mortgages, check out our blog.