Reverse Mortgage Defined
By Sonia C Llesol
A reverse mortgage is a special kind of home loan that allows you to switch a part of the home equity to cash. The home equity that build up through the years of your mortgage payments may be paid to you. However, unlike a traditional home equity loan or a second mortgage, there is no repayment needed for this mortgage until the borrower no longer uses the home as his or her main residence.
This type of loan is available to seniors and used to release the equity of the property as a lump sum or through multiple payments. The responsibility of the homeowner of repaying the loan is put off until he or she dies, sold the house or leaves to a retirement home or aged care.
Reverse mortgage are extremely popular in the United States. The FHA created one of the first reverse mortgages which allows you to withdraw some of the equity of your property. To be qualified for a reverse mortgage, you should be a homeowner of 63 years or older with a low mortgage balance that can be paid off during closing with the proceeds from the reverse loan. Furthermore, you should be living in the home.
A reverse mortgage is eligible for a single family home, 1-4 unit home with a unit occupied by the owner or borrower, HUD-approved condos and manufactured homes that meet the FHA requirements.
If you sell your home, your estate or your will repay the cash received from the reverse mortgage and interest and other fees to the mortgage lender. The remaining amount, if any, will belong to you or your heirs. The amount you can borrow will depend on your age, the present rate of interest and the appraised value of your property or the FHA’s limits in your area, whichever is lower. In generally, the higher the value of your home or the older you are, the lower the interest and the more you will be able to borrow.
The funds you get from your reverse mortgage could be used for any purposes with no restrictions, such as education funds, retirement funds, vacation or cruises. You will get considerable flexibility in receiving and using the money and you may opt to receive a lump sum pay out, line or credit or monthly check. Furthermore, it allows you to continue living in your home until you pass away, move out or fail to pay taxes and maintain your home.
Nevertheless, reverse mortgage also have drawbacks and they are more expensive. Also, they have the potential of being abused and gained for improper reasons because it is nobody’s responsibility to monitor how the funds are going to be used. Additionally, the moment you breach the contract, the lender can foreclose the loan and any living spouse or children will not be allowed to continue living in the property unless one of them is listed as a borrower during the obtaining of the loan.
Furthermore, if the borrower fails to pay his or her insurance and taxes and fail to maintain the property properly, the lender has the right to recall the loan.
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