Tom Selleck (Magnum P.I.) and Arthur “The Fonz” Fonzarelli (Happy Days) don’t share the same sense of fashion, nor would they agree on the best place to live. However, both have tried to persuade you to consider a reverse mortgage. What is this thing that could bring two such disparate souls together?
A reverse mortgage is a loan secured by your home. However, instead of you sending monthly payments to the lender to pay-off the mortgage, the lender typically wires money to you each month until either you sell the home or you die.
This is the first of two articles. In this article, we provide a brief introduction to reverse mortgages. In the second article which will appear next week, we will discuss some factors that one should consider before attempting to secure a reverse mortgage.
A Reverse Mortgage Primer
A “reverse” mortgage is a loan where the balance goes up over time, instead of going down over time. A reverse mortgage differs from a traditional mortgage because the borrower receives a stream of payments or a lump sum of cash from the lender, but the borrower/homeowner makes no monthly payments to the lender. Rather, as time passes, the balance outstanding on the reverse mortgage increases, as monthly interest charges and other fees are added to the loan balance. The homeowner is not obliged to make any payments on the reverse mortgage until either the homeowner dies or the homeowner moves out of the home.
While the homeowner is not obliged to make any monthly payments to the lender during the course of the reverse mortgage, the homeowner is required to do the following three things: pay property taxes on the home, maintain homeowner’s insurance and complete all necessary repairs to ensure that home is legally habitable per local ordinances.
For homeowners who do not have adequate income to pay their basic household bills and where at least one of the homeowners is 62 years old or older, a reverse mortgage could be a possible tool to increase the homeowner’s cashflow.
Types of Reverse Mortgages
We can divide reverse mortgages into two broad categories: reverse mortgages insured by the Federal Housing Administration under its ‘Home Equity Conversion Mortgage (HECM)’ program, and reverse mortgages provided by private lenders that are not insured by the FHA.
We do not encourage anyone to use the second type of reverse mortgage — one provided by private lenders that are not insured by the FHA. Some providers of products not insured by the FHA sometimes push reverse mortgages on borrowers without accurately and clearly describing all of the downsides of the loan.
To qualify for a HECM reverse mortgage (which is government insured) on your home, you must meet all of the following requirements:
• You are 62 years old or older.
• Your home must be your principal residence, where you reside the majority of the year.
• Your home is worth significantly more than any outstanding mortgages on the home.
• You are not delinquent on any federal debts (e.g. student loans, farm loans, etc.)
• You have adequate financial resources to make timely payments on property taxes, homeowner’s insurance, homeowner association fees and related items.
• You must complete a counseling session with an independent HUD-approved counselor.
In addition to the preceding requirements, your home must be one of the following four types of residences:
• A single family home.
• A HUD-approved condominium project.
• A manufactured home meeting FHA requirements
• A two-to-four unit home and you occupy one of the units.
Want to know more? Next week, we briefly discuss some factors that one should consider before attempting to secure a reverse mortgage. So, come back next week to find out if The Fonz and Tom are on the level.