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What is a Reverse Mortgage?

A reverse mortgage or HECM (home equity conversion mortgage) is a loan that allows homeowners over the age of 62 to convert a portion of their equity in their homes into income.

The equity built up over years of home mortgage payments can be paid to you. Homeowners continue to retain full ownership of the property. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer uses the home as their principal residence. Reverse mortgages are government-backed and regulated by FHA, Department of House and Urban Development (HUD) and private banks, and it is federally-insured as well.

Reverse mortgages provide a steady source of tax-free income from which the proceeds may be taken as a lump sum, monthly distributions, line of credit or any combination of these financial options.

The amount of money available with a reverse mortgage is based on three (3) factors:

1. Age of borrower (all borrowers must be over age 62)
2. The appraised value of their home
3. Current reverse mortgage rates


How are Funds Determined?

The amount of available funds for which a borrower can qualify are determined by the borrower’s age, current interest rate and the appraised value of their home. There are no income or credit requirements and they will not have any monthly payments for as long as they live. There are fixed rate, adjustable rate and HECM saver options. The saver HECM allows borrowers to reduce their closing costs by eliminating the mortgage insurance premium, but it also reduces the amount of eligible funds for a borrower.

Once an application is completed and the required HUD counseling is performed to make sure the borrower understands how the reverse mortgage works, the process to get the reverse mortgage approved commences. Borrowers are still responsible for property taxes and home owners insurance. Since the government requires insurance on the reverse mortgage loan, the borrower’s estate can never owe more than the home is worth when the note becomes due.

Uses for Reverse Mortgages

Customers can utilize reverse mortgages for a variety of situations. Many utilize them to pay off hospital and medical expenses. Others pay off mortgages so they eliminate monthly payments. Home improvement is another use of the money to keep houses in a good state or repair. Since fixed income customers need additional funds for daily and monthly expenses, reverse mortgages are a great source of income.

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