Home Equity Conversion Mortgages, also popularly known as reverse mortgages, are financial arrangements in which the bank makes payments to the homeowner. These payments are based upon a percentage of the value of, or equity in, their home. It is called a reverse mortgage because it is the exact opposite of a traditional mortgage, in which the homeowner pays the bank until they completely pay off the balance of the loan. In a reverse mortgage, the payments that the bank makes accumulate in the form of a loan, but in this case, the borrower isn't obligated to pay it back while they live in the home. If the borrower dies, moves out, or sells the home, then the loan amount generated by the reverse mortgage comes due. In the meantime, the payments that the bank makes go into the homeowner's hands, which gives them extra spending money. Using one's home to generating extra spending money when traditional equity loans are unavailable is the purpose behind reverse mortgages.
In the United States, reverse mortgages are available to homeowners who are 62 or older. This is because the program is considered a retirement vehicle, which means that it is primarily intended to help seniors increase their income during their retirement years. The amount of money a senior citizen can receive from a reverse mortgage is limited by a variety of factors. These factors include the value of the property and the age of the homeowner. The older the loan applicant is, the higher the value of the loan may be and the more money he or she may receive. However, if the applicant is married, then the age of the youngest spouse will be the deciding factor. Interest rates also affect the amount of money a reverse mortgage can make available to the homeowner. A higher rate means less money is available in a potential reverse mortgage. There is also an absolute limit on the value of a reverse mortgage loan, which as of 2013 was raised from $417,000 to $625,500 by the Federal Housing Administration (FHA). To be eligible for a reverse mortgage, the applicant must be living on the property, and it must be their primary residence. If there is an existing mortgage on the home, the balance must be low enough for the money from the reverse mortgage to pay it off. A variety of properties, from manufactured housing to most family dwellings and condominiums, are considered to be eligible.
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Reverse mortgages are intended to help seniors access the monetary value that exists within their properties. Not all seniors may be able to take out traditional home equity loans on their homes due to their financial conditions and also due to various rules regarding bank loans. A reverse mortgage can allow seniors to get cash out of their home even when they cannot qualify for a traditional equity loan. In terms of a reverse mortgage, seniors can choose a variety of payment options to suit their lifestyle. These options include a line of credit, which works as a lump-sum payment, or monthly payments. Monthly payments can come in the form of tenure payments, which continue as long as at least one borrower lives at the property. Another form of monthly payment is a term payment, in which the borrower receives payments for a set number of months. Modified term and tenure payments also exist, which offer a line of credit plus either term or tenure payments. If a borrower outlives the value of the loan, however, the government makes it illegal for the lender to take the home, as long as the borrower still lives on the property. The lender also cannot require the borrower to repay the loan. Because the FHA places a limit of $625,500 on the size of the reverse mortgage loan, it is possible for a reverse mortgage borrower to sell a very high-value home later on, pay off the loan, and still have money left over.
Reverse mortgages are in some ways like annuities in that they can provide money on a monthly basis for borrowers for the rest of their lives. Seniors can benefit from these programs for a variety of reasons. These include going on vacations, making home improvements, or even meeting their living expenses. However, home equity conversion loans are complex financial instruments, and as with all types of loans, seniors should approach them with caution. Interested seniors, by law, must speak with a counselor regarding their options and the pros and cons that come with reverse mortgages.
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