For seniors age sixty-two (62) and older, a reverse mortgage may be a helpful way to generate income locked into their largest currently held asset; their primary residence. Certain homeowners, who are eligible, can qualify for a reverse mortgage with their lender, which will allow them to take out a lump sum, receive a monthly income, or draw upon a line of credit for any transaction they may desire. The following outlines how certain homeowners may find a reverse mortgage beneficial.
Good Candidates for Reverse Mortgages
Eligibility requirements for reverse mortgages require a homeowner to be sixty-two (62) or older with a mortgage either entirely or nearly paid off, or in the case of joint owners, both owners must be older than sixty-two (62) years old. In additional, homeowners must live in the residence involved in a proposed reverse mortgage transaction. Other considerations include mandatory counseling and other informational meetings with approved entities before agreeing to a reverse mortgage, as well as whether a given piece of property is eligible for reverse mortgage lending.
Though most retirees will qualify for a reverse mortgage, not all are good candidates per se. Typically, a homeowner that is older in age, has already paid off their existing mortgage, has a relatively valuable primary residence, subsists on a low or fixed income, and plans to remain in their current residence indefinitely will be a good candidate. Additional considerations, though not entirely reliable, include whether a given property will increase in value in the coming years and how long a given homeowner expects to be able to remain living in their current home, from a physical ability and medical perspective.
Borrowing Limits Applicable to Reverse Mortgages
The federal government does impose borrowing limits on reverse mortgages. These federal guidelines on borrowing limits vary based on the market value of a home, the interest rates applicable to a reverse mortgage, and the age of the borrower. Currently, home-equity conversion mortgage (HECM) with the FHA, which over ninety percent of retirees utilize, limits the appraisal value of a home figured into borrowing limits at $625,000, as of 2010. When taken together, all these figures will determine the annual and total borrowing limits for an individual homeowner. The following list outlines the general borrowing limits applicable to all reverse mortgage holders, including:
- Annual limits on borrowing are chiefly determined by the geographic location of the borrower’s home
- The total limits on borrowing stand at eighty (80) percent of the current equity interest in a given home, which may fluctuate over time, either decreasing or increasing
- Borrowing can take place in the following methods: a lump sum payment with the highest interest rates, term, tenure, line of credit, modified term, and modified tenure
Repayment of Reverse Mortgages
Repayment of reverse mortgages or home-equity conversion mortgages (HECM) are only made once a homeowner dies or sells the residence held as security in the reverse mortgage. Certain other cases require payment of a loan in full in the event a homeowner does not pay insurance or property taxes, fails to meet residence requirements, or fails to reasonably maintain the property. However, once a loan becomes due and payable, the property will either be sold or refinanced through a third party lender. The proceeds from these transactions will first pay off a lender and the remaining amount will go to the living homeowner or their heirs. In the event a homeowner borrows more than the value of their home sale, in spite of the eighty percent cap on borrowing limits, lenders are typically insured by the federal government and reimbursed for losses.
Getting Legal Help
Not all homeowners will benefit from reverse mortgages, and given their relative complexity and the targeted market, the federal government has placed counseling requirements on any applicant for a reverse mortgage to ensure they understand the process and implications of the loan. With legal counsel, a homeowner that qualifies for a reverse mortgage can ensure the transaction is occurring in a favorable manner, as well as appreciate the terms and conditions applicable to their specific reverse mortgage. Reverse mortgage lending has received a large amount of negative publicity in the past, most of which stems from homeowners entering into reverse mortgages without taking the necessary steps to understand fully the nature of the agreement, as well taking steps to protect themselves from predatory lending. Consulting with an attorney can help prevent both these negative instances from occurring in your possible reverse mortgage agreement.
