A reverse mortgage is a unique type of loan that actually pays the borrower. These loans allow borrowers to access a portion of the equity in their home, which they will receive as a lump sum, in installments, or as a line of credit. Unlike other loan types, this unique product will not become due on a specific day. Instead, borrowers are only required to repay the loan once they are no longer occupying the residence.
These financial products are typically used to increase a person's income, renovate one's home, or repay a traditional mortgage loan. In most cases, borrowers are allowed to use the money however they please. Before applying for a loan, consumers will want to understand the following reverse mortgage information.
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Basic Reverse Mortgage Information: Qualifications and Loan Limits
There are three types of reverse mortgage loans: single-purpose, federally-insured, and private loans. Singe-purpose loans are available to low- or moderate-income consumers through different nonprofit and government agencies. These loans must be used for a specific purpose, like paying one's property taxes, as specified by the provider.
Federally-insured, or Home Equity Conversion Mortgage (HECM), loans are insured by the US Department of Housing and Urban Development (HUD). While there are no stringent income requirements, HUD sets limits regarding the amount that a person may borrow.
Private loans are those given by private financial institutions and are not insured by the federal government. These loans are typically more expensive, but are not subject to the same limits as HECMs. Borrowers are not required to meet certain income or credit requirements to qualify for this product from a private lender.
To qualify for each of these loan types, borrowers must meet certain requirements. Borrowers must be at least 62 years of age, own their home, and use the home as a primary residence. The property must be considered a single-family home, two to four unit property, condominium, or a manufactured home built after June of 1976.
The amount a person may borrow will depend on his or her age, the amount of equity in the home, the appraised value of the home, and the individual's interest rate. Borrowers applying for a federally-insured loan will also be restricted to the lending limits in their area. To ensure that consumers understand this reverse mortgage information, borrowers must also attend a counseling session administered through an approved agency. During counseling, the counselor will explain the consumers options and discuss whether or not it will be beneficial.
Costs, Advantages, and Other Reverse Mortgage Information
After familiarizing oneself with basic reverse mortgage information, most borrowers begin wondering about the cost of these loans. Borrowers can expect to pay closing costs, a loan origination fee, interest, and mortgage insurance premiums if applying for an HECM. Some lenders will also charge service fees throughout the duration of the loan. While some of these costs might be negotiable, others, like the origination fee, are set by law. Because fees vary by lender, borrowers are urged to discuss this reverse mortgage information prior to accepting the loan.
There are also costs associated with maintaining a reverse mortgage. To maintain the loan, borrowers are required to keep their home in good condition. They must perform necessary repairs, carry adequate homeowner's insurance, and pay their property taxes. Borrowers that fail to meet these conditions may be required to prematurely repay the loan.
While there are costs associated with obtaining a reverse mortgage, there are also many benefits. Unlike a home equity loan or second mortgage, borrowers are not required to meet specific income or credit requirements. For many seniors, reverse mortgages are easier to qualify for. These loans also provide seniors with funds that they would not have otherwise. This is what ultimately inspires many seniors to seek out reverse mortgage information and eventually apply for a loan.
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