A reverse mortgage, also known as the home equity conversion mortgage (HECM) in the United States, is a financial product for homeowners 62 or older who have accumulated home equity and want to use this to supplement retirement income.
How It Works
When you own a home with a traditional mortgage, you gain equity over time as you pay down the loan. Home equity is the difference between what your home is worth, its appraised value, and any debt that you have from mortgages against the home. Let’s say, for example, that you own a home worth $300,000 in today’s real estate market, and you only owe $50,000 on the mortgage balance, having paid down the rest. You have valuable home equity worth $250,000, which we calculate by taking $300,000 and subtracting the $50,000 still owed. If you are like most Americans, the chances are high that this $250,000 worth of equity represents a substantial portion of your net worth, and as you reach retirement age you may want or need to tap into this wealth to supplement your fixed income.
There are a few options for tapping into your home equity that you may be familiar with – selling the home, taking out a home equity loan, or obtaining a home equity line of credit. However, these options may not be suitable for you – selling your home doesn’t make sense if you do not wish to move, and home equity loan and HELOC options may be difficult to obtain.
There is an alternative solution, however, and that is the reverse mortgage. If you are eligible and the product is suitable for your needs, a lender can offer you fixed monthly payments or a line of credit based on the value of your equity. Though there are other factors involved, you can think of the lender giving you a loan to you based upon how much equity you have in the property.
How Much Can I Borrow?
The amount of your reverse mortgage is based on how old you are, how much your home is worth, and the interest rate that you are offered on the loan.
Generally speaking, your borrowing power increases:
- When you are older. An 80 year old will be able to borrow more than a 62 year old if all other factors are equal.
- If your home is more valuable and/or you have a higher amount of home equity.
- As interest rates fall. You will be able to borrow more at a 4% rate than a 6% rate.
How is the Government Involved?
This is a big point of confusion, especially since advertisements have sometimes promoted the reverse mortgage as a “government benefit” of some kind. First, it’s important to note that the FHA, a government agency, is not loaning you any money. You are working with a private company, and the FHA is providing a guarantee on your loan. This guarantee protects you in two significant ways.
First, the FHA guarantees that the senior will receive all the payments that he or she is entitled to as a result of the reverse mortgage. This removes the risk of the lender going bankrupt or simply refusing to make good on its obligations. Second, the FHA protects the borrower and his/her estate from ever owing more on the loan than the home is worth. In circumstances where the debt outstanding on the reverse mortgage exceeds the value of the home, the FHA covers the difference.
The amount of your reverse mortgage is based on how old you are, how much your home is worth, and what interest rate the lenders offers to you. Generally speaking, the older you are and the more your home is worth the more you’ll receive.
With a reverse mortgage there is no loan to repay as long as you are alive, living in the home, and keeping the terms of your loan. You can have the money disbursed to you in the form of a check or a line of credit. Lump sum payments are also popular; in 2011, 73% of borrowers chose a lump sum payment.
The loan generally does not have to be paid back until either the last surviving homeowner dies or moves out of the home. After that happens, the estate typically sells that home and uses the proceeds from that sale to repay the reverse mortgage loan. If there is extra money left over the heirs get to keep it. If the house is sold and there is not enough money to repay the payments that the lender has made, then it’s tough luck for the lender. They have to accept the financial loss and cannot go after the heirs for the balance.
California Reverse Mortgage is available in the following areas/cities
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