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Here's the explanation from the United States of America Federal Trade Commission. According tho the FTC, a reverse mortgage is...

If you’re 62 or older – and want money to pay off your mortgage, supplement your income, or pay for healthcare expenses – you may consider a reverse mortgage. It allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. But take your time: a reverse mortgage can be complicated and might not be right for you. A reverse mortgage can use up the equity in your home, which means fewer assets for you and your heirs. If you do decide to look for one, review the different types of reverse mortgages, and comparison shop before you decide on a particular company.

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A reverse mortgage is an option for homeowners that offer an alternative to traditional loans. The premise of a reverse mortgage is simple: you own your home and have equity, but need cash; the bank will give you the cash, but take your house when you die or move. Reverse mortgages are called "reverse" because they provide funds by taking something (your house) instead of providing something (a loan). Although reverse mortgages can be helpful in certain situations, they are not appropriate for all homeowners.

Mutual of Omaha Mortgage

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A reverse mortgage, also known as a home equity conversion mortgage, is a special type of home loan that allows homeowners who are 62 or older to convert a portion of their home equity into cash. Instead of making regular payments to the lender as you would with a traditional mortgage, homeowners with a reverse mortgage receive cash payments from the lender.

Finance of America Reverse

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To qualify for a reverse mortgage, your home must have an equity of at least five years of homeownership. Holding a loan with a closing balance of at least five years of homeownership is a requirement for someone to qualify for a reverse mortgage loan. The balance can vary over time, even between loans granted on the same property. In some cases, you might need to sell the property before the equity can be increased, or the balance can increase because you purchased the home at a high-sale price. Your home must also be your principal residence and not an investment property used for rental purposes. You cannot have a history of liens on your home or multiple properties that you are thinking about selling or moving to.

A reverse mortgage essentially involves lending money from a bank to you at a higher rate than you would receive from another person. For each $100,000 of equity that you have, your loan amount can be increased by $5,000. Lender — usually a bank — agrees to make payments to the borrower for a fixed period of time as long as the balance is maintained. The length of contract can vary between 30 and 54 months.

Because a reverse mortgage is not a traditional mortgage, there are key points to consider before you decide to use one. The following factors should help determine whether you should pursue a reverse mortgage loan.

Reverse mortgage loans typically have a lower amortization period and higher payment limits than monthly mortgage payments. However, when monthly payments start to climb, periodic payments called grace periods, which allow homeowners to pay the remaining balance before interest kicks in.

Reverse Mortgage Expert

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A reverse mortgage is a home loan that gives homeowners the opportunity to receive a lump sum of cash in exchange for the equity in their home. The borrower does not have to make any monthly payments, and the loan does not have to be repaid until the borrower moves out or sells the home.While an interest-only loan can provide a downpayment for personal or family use, it is generally not a suitable option for someone wanting to purchase a home. Interest-only loans generally have fixed rates, the rate the lender increases when the loan is used to borrow more money. Variations in the interest rate charged by the lender can have a significant impact on the borrower’s ability to afford the home loan. Up-front payments to buy a house can be attractive to a consumer who has many years ahead of them. The monthly payment while you are in the home can be balanced by the increased income potential when you exit the home and move to where you will finish paying off the loan.

For someone who wants to buy a home but does not want to receive a high interest rate, a fixed rate option geared towards term loans is a more suitable home loan option for them. Fixed-rate reverse mortgages can provide the same amount of debt as interest-only loans, but some fixed-rate Reverse mortgage loans provide several types of equity, including cash, through a deferred sale value and/or a compulsory retirement fund. Being a fixed-rate loan does not give a borrower access to greater flexibility while making a home purchase, but it does give them the option to buy the home they want without worrying about its market value.

If you are married or together with your spouse, a joint or spousal reverse mortgage is a good option for you. You do not have to start paying off your loans until you sell your home.

Premiere Reverse Mortgage

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Who can benefit from a reverse mortgage?

Many reverse mortgages are for people who are in a financial pinch but still want to stay in their own homes. For example, if you are a senior who needs money to repair your home or pay a medical bill and your house is the most valuable asset you have, a reverse mortgage may be an option for you. Remember, a reverse mortgage is not a loan.Reverse mortgages come in various forms, including fixed unit, equity compact, and inflation-adjusted payments. Fixed unit mortgages provide funding for specific capital improvements such as foundation, roof, deck, or sewage connection. Fixed unit mortgages usually require a down payment of several months of the salary. Equity compact mortgages provide funding for purchasing a primary residence that is not your main residence. An example would be a family buying a home for the family vacation or to avoid property taxes. Finally, there is an inflation-adjusted reverse mortgage, which is more common now as accessible for individuals with equity. Equity-adjusted reverse mortgage allows consumers to take an existing home and provide additional equity for those times when they are unable to acquire income-producing properties.

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What Is a Reverse Mortgage?

A reverse mortgage is a loan. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment or line of credit. Unlike a forward mortgage—the type used to buy a home—a reverse mortgage doesn’t require the homeowner to make any loan payments.

Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently or sells the home. Federal regulations require lenders to structure the transaction so the loan amount doesn’t exceed the home’s value and the borrower or borrower’s estate won’t be held responsible for paying the difference if the loan balance does become larger than the home’s value. One way this could happen is through a drop in the home’s market value; another is if the borrower lives a long time.

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A typical purchase of a reverse mortgage is the first payment that is due on the mortgage. The first payment usually involves the seller acquiring the funds and writing a check. In return, the buyer is responsible for paying the balance of the balance due on or before the due date before the end of the 31st calendar month after the mortgage is taken out. For the actual purchase price of the home, the balance due is calculated as the difference between the cost of the property and the residual value (value of the home after all costs are deducted) of the property. This amount is usually based on the sales price of the property as well as the interest rate charged by the mortgage servicer. The buyer pays approximately four percent to HARP for the loan.

Prior to the pandemic, the reverse mortgage market was thriving. Unfortunately, as more people became aware of these mortgages, the supply of available loans has been constrained.

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Reverse mortgages can provide much-needed cash for seniors whose net worth is mostly tied up in the value of their home. On the other hand, these loans can be costly and complex, as well as subject to scams. This article will teach you how reverse mortgages work, and how to protect yourself from the pitfalls, so you can make an informed decision about whether such a loan might be right for you or your parents.

According to the National Reverse Mortgage Lenders Association, homeowners aged 62 and older held $7.14 trillion in home equity in the first quarter of 2019. The number marks an all-time high since measurement began in 2000, underscoring how large a source of wealth home equity is for retirement-age adults. Home equity is only usable wealth if you sell and downsize or borrow against that equity. And that’s where reverse mortgages come into play, especially for retirees with limited incomes and few other assets.

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Who should not get a reverse mortgage?

Reverse mortgages are not for everyone. If you are looking for a loan to supplement your income or to use the equity in your home to purchase something, you should probably look elsewhere. If you are looking for a loan to supplement your income or to use the equity in your home to purchase something, you should probably look elsewhere.Reverse mortgages differ from conventional single-family mortgages (SFL) because they require that the property be revalued (demolished and leveled) before the mortgage proceeds. While some SFLs can offer fixed rates with or without equity protections, or even pay down balance if the property value goes down during the term of the loan, most SFLs do not provide alternatives to equity protection, such as options for periodic improvements or maintenance needed to keep the property current or a down payment for a home the owner is interested in purchasing.

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How a Reverse Mortgage Works

With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments (we’ll explain the choices in the next section) and only pays interest on the proceeds received. The interest is rolled into the loan balance so the homeowner doesn’t pay anything up front. The homeowner also keeps the title to the home. Over the loan’s life, the homeowner’s debt increases and home equity decreases.

As with a forward mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the home’s sale go to the lender to repay the reverse mortgage’s principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner (if still living) or the homeowner’s estate (if the homeowner has died). In some cases, the heirs may choose to pay off the mortgage so they can keep the home.

Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the IRS considers the money to be a loan advance.

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Types of Reverse Mortgages

There are three types of a reverse mortgage. The most common is the home equity conversion mortgage or HECM. The HECM represents almost all of the reverse mortgages lenders offer on home values below $765,600 and is the type you’re most likely to get, so that’s the type this article will discuss. If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.

 When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:

1. Lump sum: Get all the proceeds at once when your loan closes. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.

2. Equal monthly payments (annuity): For as long as at least one borrower lives in the home as a principal residence, the lender will make steady payments to the borrower. This is also known as a tenure plan.

3. Term payments: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years.

4. Line of credit: Money is available for the homeowner to borrow as needed. The homeowner only pays interest on the amounts actually borrowed from the credit line.

5. Equal monthly payments plus a line of credit: The lender provides steady monthly payments for as long as at least one borrower occupies the home as a principal residence. If the borrower needs more money at any point, they can access the line of credit.

6. Term payments plus a line of credit: The lender gives the borrower equal monthly payments for a set period of the borrower’s choosing, such as 10 years. If the borrower needs more money during or after that term, they can access the line of credit.

It’s also possible to use a reverse mortgage called a “HECM for purchase” to buy a different home than the one you currently live in.

In any case, you will typically need at least 50% equity—based on your home’s current value, not what you paid for it—to qualify for a reverse mortgage. Standards vary by lender.

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