The most basic explanation for what a reverse mortgage is, is that it is a loan for seniors age 62 and older that is fully regulated, and FHA insured to help protect the senior. HECM reverse mortgage loans are insured by the Federal Housing Administration and allow homeowners to convert their home equity into cash with no monthly mortgage payments.
While obtaining a reverse mortgage frees a borrower of their monthly mortgage payments, the borrower must continue to pay property taxes and insurance and maintain the home according to FHA guidelines. Typically, the loan does not become due if you live in the home as your primary residence and continue to meet all the loan obligations.
Most seniors take out a reverse mortgage to help pay for home renovations, medical and daily living expenses as well as to buy smaller rental properties outright and or to downsize. Homeowners who have an existing mortgage often use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments.
A reverse mortgage uses a home’s equity as collateral for the loan with the amount of money the borrower receives being determined by the age of the youngest borrower, the interest rate on the loan, and the home’s appraised value. A portion of the funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM requirements. In addition, you may need to set aside additional funds from loan proceeds to pay for taxes and insurance if you are required to set up a LESA which is an impound account due to bad credit or a history of missing tax or mortgage payments in the past.
The loan does not generally have to be repaid until 6 months after the last surviving homeowner moves out of the property or passes away and in most cases the borrowers’ heirs can request an extension. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the heirs receive any remaining equity. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage loan since the loan is insured.
Have more questions? Call us today and speak with one of our Reverse Mortgage Professionals: 805-738-8326
Article By: Cristian Peralta
Written: 8/5/2019
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