To begin with, borrowers must be at least 62 years of age or older to qualify for a Reverse Mortgage. Secondly, they must also own their home outright, or have a low enough mortgage balance remaining on the home, that it can be paid off with part of the proceeds from the Reverse Mortgage. Lastly, at least one borrower must live in the home.
For this reason, it may not be a great idea to start a Reverse Mortgage process if you plan to move soon. Leaving the home for any reason puts the loan into default, which means that you must begin paying it back immediately upon forfeiture of the property.
You might receive a Reverse Mortgage even if you did not purchase the home originally with an FHA-Insured Mortgage company, including those who qualify for approval in their HUD or manufactured homes, including condominiums.
Homes that are eligible for the Reverse Mortgage must be between 2-4 bedrooms, with at least one of the units being occupied by a borrower. As long as you are residing in the home, there is no requirement to make any payments on the loan balance; however, it is your responsibility to remain up to date on all property taxes owed, homeowner’s insurance fees, or condominium fees.
A Reverse Mortgage is not the same as a Home Equity Loan. With a second mortgage (or a home equity credit line), those who borrow are required to make a monthly payment on the principal and then interest. A Reverse Mortgage is much different because there are no monthly payments, no principal or interest to be paid. Instead of making a payment to the mortgage company, at this point, the company will be making payments to you.
Another great thing about a Reverse Mortgage is that none of the debt accrued can be passed on to anyone else. When a home with a Reverse Mortgage is sold or no longer being used as a main residence, the cash, interest and financing charges must be repaid. However, any proceeds that go beyond the amount that the borrower owes will belong to the estate, or to the remaining spouse. Remaining equity is available for transfer to heirs. There is never any debt to be passed along to your estate, or heirs.
How much a person qualifies for also depends on the age of the youngest borrower and the current interest rates. Other qualifying factors include the appraised value of your home or the HECM payout cap (currently $417,000), whichever is lesser, in addition to the original sales price of the home, or the initial mortgage insurance premium paid.
If you plan on taking out a Reverse Mortgage, but then change your mind, you should know that you have three calendar days to cancel your loan. This is known as a Three Day Right of Rescission. It has been recommended that borrowers try to locate a Reverse Mortgage with a variable rate that will let them draw from all of their available credit, instead of taking a lump-sum payment, which is required for those who locate fixed rate Reverse Mortgages. Once homeowners remove all of the cash available from their home, it is possible that they will not leave enough left behind to pay their property taxes or insurance.
If you currently have a mortgage, you do not have any issues making your payments, and you have other sources of equity or assets, it might be a better idea to wait on your Reverse Mortgage. Many borrowers make the mistake of removing their funds too soon, leaving them with problems down the road when it comes time to pay other fees, or worse, leaving them with no cushion should they fall upon a hardship or require full-time medical care.
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