Reverse mortgage loans are a type of home loan that enables eligible homeowners to access a portion of their home’s equity. Reverse mortgages are not as complicated as some seniors believe them to be. Reverse mortgages can convert part of the equity in your home into cash without the need to sell your home. Your loan will be due in full when you die, choose to sell your home, or when you decide that the property is no longer your primary residence. Many reverse mortgages do not have income restrictions and are generally tax-free.
The Home Equity Conversion Mortgage or HECM is one of the most popular reverse mortgage products, and it accounts for 90% of all reverse mortgages in the United States of America. HECM is a federally insured reverse mortgage program and is supported by the FHA or Federal Housing Administration. There are a few payment options available under the different types of reverse mortgage products. You can receive proceeds from a reverse mortgage through lump sum cash disbursements, a line of credit, fixed monthly payments or a combination of these options. There are different types of reverse mortgages and these are classified based on their different payment options.
A “Term” option works by giving monthly payments for a fixed period of time. The amount will be based on the age of the borrower and the equity in the property. The borrower will decide the amount of payments. A general rule is that the higher the amount, the shorter the time over which the borrower gets paid. When all the payments are made, the loan is exhausted. The borrower does not have to pay the loan as long as the individual or couple continues to live in the property.
A “Tenure” option works by also giving equal monthly payments as long as at least one of the borrowers continues to reside in the property. The amount of the loan will be based on the life expectancy of the borrower along with the equity in the property. This option allows the borrower to receive payments until the borrower’s death.
A “Line of Credit” option is where the borrower can choose when payments will be disbursed and at the amount until the credit is exhausted. A reverse mortgage credit line is the same as an equity line of credit, because it allows the borrower to use the credit without any restrictions until the limit is reached.
A “Modified Tenure” option is a combination of a line of credit with monthly payments. This option is offered to help those individuals who require a lump sum of cash and would still like to receive monthly-fixed payments. This is dependent on the amount the borrower qualifies for. This is also available as long as the borrower resides in the property.
Lastly, a “Modified Term” option has the “Line of Credit” along with the “Term” option method of payments. This is the same as “Modified Tenure” but with the monthly-fixed payments set on a specific period of time and not the borrower’s lifetime. The type of loan payment can be changed if the borrower's circumstances change.
Reverse mortgages for seniors also allows homeowners the freedom to make payments with no pre-payment penalties if they choose to do so. The title to the property will remain in the name of the homeowners. Additionally, if the property increases in value after a reverse mortgage is taken out, it is possible to acquire a second or even a third reverse mortgage based on the increased equity in the property. It is also possible to refinance a reverse mortgage when there is enough of an increase of equity so you can avail a lower reverse mortgage interest rate. It is very important to learn about all the details before you take out a reverse mortgage on your property.