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What is a Reverse Mortgage?

By Edited Nov 13, 2013 0 0

Reverse mortgage loans that are offered to senior citizens are becoming more and more popular. Often referred to as a reverse equity mortgage, the loan does not charge a monthly mortgage payment. As a result, these so called reverse loans are normally easier to manage compared to a traditional home loan.

If you are interested in securing a reverse home mortgage such as this, there are a few options to consider as your first step. You can either get in touch with one of the top mortgage lenders in your area, or by looking on the internet for an online mortgage quote. Regardless of how you want to proceed, the first step in the reverse equity mortgage process must be taken by you!

The Facts About Reverse Equity Mortgages

A reverse mortgage is a loan that is given to senior citizens (62 years and above) to pay the home equity in the property. This can be done in numerous installments or all at once. The repayment of the loan is deferred until the homeowner dies, leaves, or sells the house.

In most countries, including the United States, the property cannot be mortgaged before or after a reverse mortgage is taken out. Before taking such loan, you need to check out what kind of rates are available. A few mortgage rate options include -

  • fixed rate mortgages
  • variable mortgage rate
  • adjustable rate mortgages
  • interest only mortgages

What is a Home Equity Conversion Mortgage?

The Home Equity Conversion Mortgage (HECM) is the most popular product when it comes to a reverse equity mortgage. The factors on which a HCEM is created depends on the age, appraised home value, and location of the house, as well as the present rates of interest. The oldest in the market, it is insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.

Unlike regular mortgages, a reverse mortgage doesn't allow the homeowner to make regular payments to the lender. Instead the interest is added on to his/her property. As the owner receives the money, either in monthly payments or as a lump sum, the debt increases on the property each month.

Who Are the Major Investors of Reverse Equity Mortgages?

Fannie Mae is one of the major investors of reverse mortgages in the US. It also finances the HECM mortgage program. In 1996, Fannie Mae launched its proprietary Home keeper reverse mortgage to cover loans that cannot be covered under the HECM mortgage program. It must be in the kind that Fannie Mae is not a lender. It is approved when and to whom the Home Keeper reverse mortgage can be extended.

Home Keeper mortgages are ideal for people who wish to sell off their old homes, pay off their mortgage early, and move into new ones. It allows home owners to buy a new home without making monthly mortgage payments and utilizing less money from the savings or the sales proceeds of the old house.

What Type of Properties are Eligible?

Owner-occupied single-family homes, condominium units, units in planned unit developments, trust and leasehold properties are eligible to get reverse mortgages from the Home Keeper. The amount mortgaged is dependent on age, home value and present rates of interest.

The mortgage limit of Fannie Mae is higher than that of FHA. Consequently, you can get a higher mortgage amount under Home Keeper than HECM mortgage. Conventional reverse mortgages have higher credit limits and lower upfront costs than a home equity conversion mortgage, but offer similar consumer protection like counseling and asset protection. Also called jumbo loans, they are not issued by the federal government. They charge an interest rate that is based on the London Interbank offered rate (LIBOR).

Final Thoughts

Taking out a reverse loan may seem like a scary situation. The recent economic meltdown over subprime mortgages, interest only loans, and adjustable rate mortgages have not helped matters. All that said, taking out this type of mortgage does have it's benefits and is a viable financing option. Make sure you study up and do your homework on these types of mortgage loans if you have any interest!



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