Reverse Mortgage Explained

For the elderly, sometimes mortgage payments, medical bills and waning social security can put a stain on one's financial situation. Today, there are many options available to deal with these concerns. Since 1989, thousands of elderly homeowners have chosen to establish reverse mortgages. In a reverse mortgage, homeowners receive payment from a private lender, while still maintaining ownership of their property. This way, elderly homeowners can supplement their income, keep their home and not have to worry about monthly mortgage payments.

How does it work?

When a reverse mortgage is established, the homeowner has a choice of receiving the loan in monthly installments, a lump sum payment, a line of credit account, where money can be drawn from as needed, or any combination of the three. After the owner dies or moves out, the lender takes ownership of the property unless the owner or heirs repay the loan. Some homeowners have chosen to sell the property and pay off the loan with the profits. If the homeowner lives in the property until death, the value of their estate is reduced by the amount owed in the loan, and if the property is sold for more than the amount owed, the excess money goes to the homeowner's estate.

Qualifications and Conditions of a Reverse Mortgage

In order to qualify for a reverse mortgage, the recipient must be at least 62 years of age and must live in the property to which the reverse mortgage is applied as his or her primary residence. The older the homeowner is, the more money he or she will be able to receive. At current rates, a homeowner aged 62 can receive 30% of the value of their property, and an owner aged 95 can receive up to 80% of the property's value, therefore some lenders advise it is best to wait until the homeowner is older to set up a reverse mortgage. Others factors on how much the borrower can receive are the specific program chosen, the value of the home at current interest rates and sometimes the location of the home.

The amount borrowed cannot exceed the established value of the property or the maximum value allowed by the Department of Housing and Urban Development. Generally the amount allowed is based on which of these values is lower.

Because a reverse mortgage, as with any mortgage, allows the buyer to still hold the deed of the property, they are still responsible for taxes, insurance and any maintenance and repairs needed for the home.

Before taking out a reverse mortgage, most lenders require the homeowner to participate in an independent credit counseling session with a Federal Housing Administration approved counselor as part of the application process. This session is necessary to educate the borrower on all the options available, and to be sure the borrower understands all the procedures and stipulations of the loan. This session is at no cost to the borrower and can be conducted either in person or over the phone. Upon completing the counseling session, the borrower receives a certificate, which they then send with the mortgage application by mail.  

With our troubled economy and the aging baby boomer population putting stain on social security, many elderly property owners worry about their financial situation. Over the last three decades, reverse mortgages have helped thousands of homeowners attain supplementary income in their later years. There are no restrictions on how loans are to be utilized, so many borrowers are using their extra income to finance second homes or simply to help pay for necessities. Reverse mortgages can also alleviate the stain of how to deal with the their property when they want to move out or after they pass away. However, reverse mortgages are not for everyone. Some borrowers only see a portion of what their home is worth. Those who are considering taking a reverse mortgage should carefully consider their situation and weight the pros and cons, and as with any type of loan, borrowers should be sure they fully understand the conditions of their contract.