What Are Reverse Mortgage Loans and How Do They Work?
Reverse Mortgage loans are special types of mortgage loans created specifically for senior homeowners age 62 or older. They enable seniors to access a portion of the equity in their home and defer repayment of the mortgage interest and principal for as long as they live in their home as their principal residence. There is no monthly interest or principal payments required but the borrower is still responsible for paying property taxes , homeowner’s insurance and maintenance.
Out-of-pocket loan costs.
Other than counseling and appraisal fees that are required to be paid upfront by the borrower, there are no out-of-pocket expenses for the homeowner to pay. All other costs may be and usually are financed into the loan.
The amount of money the homeowner qualifies for is determined by the value of the home, the reverse mortgage plan chosen, the plan’s lending limits, current interest rates and the age(s) of the homeowner(s). After paying off any mortgage debt and/or liens on the property, the remainder of the funds may be taken in cash, monthly payments, a reserve line of credit, or some combination of each.
Ownership of the home does not change.
The homeowner retains title to the property. As with a conventional mortgage, a lien is placed on the title to secure the loan. As owners of the property, the homeowners are responsible for maintaining and safeguarding the property, paying the property taxes and homeowners insurance. Failure to do so could subject the loan to foreclosure.
Repayment of the reverse mortgage loan is not required for as long as the homeowners live in the home as their primary residence defined as 183 days per year. The loan becomes due and payable should the homeowners, sell, move or die. In some circumstances they can leave the home for up to 12 consecutive months for such a reason medical treatments. The loan may also become due and payable if the borrower fails to comply with any other loan term.
The loan may be paid in full at any time without penalty.
There is no equity or appreciation sharing, nor prepayment fee. The amount that is owed is the sum of what the homeowner received, plus the interest and fees that have accrued on their loan at the time of payoff. Homeowners can never owe more than the loan balance owed, even if the loan balance exceeds the market value of the home. When the loan is due for payment the lender does not “get” the home, the lender simply receives the payment of the loan balance. This usually means the homeowner or their estate would sell the home, pay off the loan balance, and retain the balance of the funds, if any, from the sale. Or, should the heirs wish to keep the home, they would pay the loan balance from their own sources including refinancing the property in their own name.
To qualify for a reverse mortgage loan each person on title must be 62 or older and must occupy the home as their primary residence. There is a financial assessment conducted to verify that the borrower has both the willingness and financial capacity to pay their property taxes, maintain their homeowner’s insurance and keep the property in good repair.