Reverse Mortgages are a relative new type of mortgage, offered mainly by non-traditional types of lenders.
Based on the appraised value and on the amount of equity a homeowner has in their home a lender provides the owner with funds secured by the value of the home.
The Reverse Mortgage is issued based on the value of the home. It is not based on credit or income standards of the home owner.
Typically these funds are paid to the owner on a monthly or periodic basis, via a credit line or in a lump-sum.
Generally, these types of Reverse Mortgages are for older homeowners over 62 years of age with non mortgaged homes or with high equity ownership interests in their homes.
With Reverse Mortgages the owner retains ownership of the home and the home is effectively used as the collateral for the loan.
From the owner’s perspective the funds received are free of income tax and the recipient can use these payments for any desired purpose.
Repayment terms of Reverse Mortgages vary and repayment of the funds received can take place at death, when the owner relocates, when the home is sold, etc. Additionally, the owner him/herself is not personally responsible for loan repayment; rather, the home itself is the collateral and security for the outstanding mortgage.
The major reason for obtaining a Reverse Mortgage is that the borrower has a need for current income for some living expense.
The amount of monthly payments an owner can receive is a function of the value of the home and the age of the income recipients. The higher the value of the home and the older the age of the owner(s) the higher the total amount which can be received. Effectively, lenders will not provide more than a certain percentage of the value of the home, since ultimately this has to be repaid at some time in the future and over the intervening time frame interest expense is constantly accruing on the outstanding balance.
Some types of Reverse Mortgages are available in all states, while other types are only available in some states.
Reverse Mortgages are structured as first mortgages and not all properties are eligible for Reverse Mortgages. For example, owner occupied principal residences and condominiums are, but vacation homes and co-operatives are not.
In addition to the current market derived rate for Reverse Mortgages the mortgage brokers and direct lenders add some sort of margin, fee or additional cost to the base cost. This can take the form of “points” other fees, or a “spread”.
Consequently, the cost of borrowing for similar loans with similar loan terms can vary for individual borrowers and from different lenders.
Reverse Mortgages are offered through mortgage brokers and from direct lenders.
Potential users of Reverse Mortgages should: ask questions, check with several offering companies, take your time and compare product offering, and understand the product. Generally speaking Reverse Mortgages are not exceedingly complex financial instruments; however, users of these type financial instruments should be conversant with and understand the terms, conditions, tax consequences and other implications of using these products for their financial needs versus other alternatives generally available to them.
