A reverse mortgage is a type of loan granted to homeowners who are at least 62 years old, where a portion of their homes’ equity may be converted into cash. The idea behind the product is to help low-income retirees by allowing them to use their homes’ accumulated wealth to pay for their daily living expenses, including health care. There are no restrictions on how proceeds from reverse mortgage may be used.
What is a reverse mortgage? The loan is called reverse mortgage because the lender will be the one making payments to the borrower instead of the other way around, as in a traditional loan agreement. The borrower will not make any payments towards the loan until he has sold the home or vacated it. However, he is expected to pay homeowners’ property taxes and insurance, as well as homeowners’ association dues as it applies.
These are the two types of reverse mortgages:
- Home Equity Conversion Mortgage (HECM)
Home Equity Conversion Mortgage (HECM) was created by the U.S. Department of Housing and Urban Development and is regulated by the same. Contrary to popular belief, HECM loans are not issued by the government. Rather, they are provided by private mortgage lenders at this website, albeit insured by the HUD’s Federal Housing Administration. Yearly, the borrower pays an insurance fee equivalent to 1.25% of the current loan balance. Thus, the loan balance rises by this fee’s amount.
The insurance bought by this fee provides protection to the borrower when the lender could not pay, and when the home’s value upon selling is not enough to pay for the entire loan balance. In the second scenario, the government will settle the balance. At present, most reverse mortgages available in the U.S. are HECMs. These loans are accompanied by rules and regulations, including borrowers having to receive third-party counseling. For more facts and info regarding reverser mortgage, you can go to http://www.huffingtonpost.com/michael-lazar/here-are-the-2-smartest-w_b_10431812.html.
Proprietary Reverse Mortgage
Very few proprietary reverse mortgages are available as of today, but they nonetheless have to mentioned as market conditions are very volatile. These mortgages are privately insured by the companies that provide them. These mortgages are also called jumbo reverse mortgages because they usually cover highly valued homes, starting at $750,000. While they are not covered by HECM regulations, most companies issuing proprietary reverse mortgages offer the same protections for consumers as in the HECM program, including obligatory counseling.
When a homeowner is in arrears, he will be advised to contact a counselor and provided a suggested repayment plan. The main job of the counselor is to find ways for the borrower to catch up on his payments. If the home has remaining equity, the borrower is usually advised to enter into a new HECM and use some of the proceeds to cover back expenses.