An increasingly popular retirement tool, the reverse mortgage has become a staple in modern times for older Americans seeking a more secure retirement. Knowing the reverse mortgage basics can help you better understand your options with these popular home loans.
Originally introduced in 1989 as an FHA-insured loan for people age 62 or older, a reverse mortgage was designed to allow homeowners to access a part of their equity without having to sell their home or make any payments until after their death.
In a reverse mortgage, the bank actually issues payments to the borrower, and it is based upon an approved portion of equity that can be borrowed. The loan only needs to be repaid if the borrower dies or moves and sells the home.
As a safeguard, it's not possible to owe more than the value of your home with a reverse mortgage, regardless of how much money you may have initially borrowed with the loan. If the balance is less than what you borrowed after you die or relocate, the difference is paid out to you or your heirs.
What are the reverse mortgage rules?The National Reverse Mortgage Lenders Association, NRMLA says that there are some simple rules for these loans.
- You must be age 62 or older.
- You must own the home and have a low mortgage balance with a good percentage of equity.
- The home must be your primary residence.
- You can use the funds as you see fit.
- You must be able to prove that you can maintain the home and pay property taxes and homeowner's insurance.
- You must receive credit counseling from a third-party provider before signing the loan.
If you have a fix-rated mortgage, the amount borrowed is paid out in a lump sum. In other situations, you can get monthly payments or a line of credit that you can borrow against. In some situations, the payout amount or line of credit can increase by a small percentage as you grow older.
A reverse mortgage is a loan that should be carefully considered first. It's imperative that you gain advice from an experienced financial advisor before you make a large borrowing decision. Consider any implications it could have on your estate and your finances so you can make a well informed borrowing decision.