Reverse Mortgage Basics

A reverse mortgage is a type of home equity loan for seniors age 62 and older used to turn a portion of their home equity into cash as needed. It was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction how reverse mortgage proceeds can be used.

The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower. The borrower is not required to pay back the loan until the home is sold or otherwise vacated.  As long as the borrower lives in the home he or she is not required to make any monthly payments towards the loan balance. 

Basic Requirements to Qualify for a Loan

In order to qualify for a reverse mortgage loan, the borrower must satisfy the following requirements:

• The borrower must be atleast 62 years old,
• He/she must own the home, on the basis of which the loan is to be applied,
• The borrower must live there as his primary residence,
• He/she must have about 50% or more equity in that home,
• The borrower must remain current on real estate taxes, homeowners insurance, and other mandatory obligations or fees.
• The borrower is responsible for completing mandatory repairs and maintaining the condition of the property.

Types of Reverse Mortgages

As you consider whether a reverse mortgage is right for you, also consider which of the three types of reverse mortgage might best suit your needs.

• Single-purpose Reverse Mortgage: A single-purpose reverse mortgage is offered by local, state and non-profit agencies. It is the least expensive of the three types, and must be used for a stated specific purpose, such as home repairs or property taxes. 
• Home Equity Conversion Mortgage (HECM): These are backed by the U.S. Department of Housing and Urban Development. HECMs are the most popular type of reverse mortgage because they can be used for any reason and they carry no income limitations or medical requirements. 
• Proprietary Reverse Mortgage: These are available only to those who have homes that appraise at a high value. Borrowers who owe less on their homes will have access to more cash. Usually, these mortgages are available through private lending companies and are used when the borrower requires a large cash advance.

Is a reverse mortgage Safe?

A reverse mortgage allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. You remain the owner of your home as long as you comply with loan terms. You can repay your loan at any time without incurring any additional costs.

Sometimes it 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.

Maximum Reverse Mortgage Limits

These limits are often unique to each lender of the proprietary and single-purpose loans, therefore it is difficult to provide the helpful guidelines. However, it is for sure that no one gets to borrow against 100 percent of their home equity. This is because unlike traditional “forward” mortgages, reverse mortgage balances increase over time. If you were to borrow against all of your equity, your loan balance would soon outstrip your home value.

Your Right to Cancel

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.” To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will let you document what the lender got, and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid for the financing.