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What is a Reverse Mortgage?
Here's a concept: what if the bank paid you for owning your home? Thatís the principle behind a moderately new investment device called a reverse mortgage.
We know what reverse means Ė backward or opposite Ė so letís look at what a mortgage is. A mortgage is a loan from a bank for a home. You have title of the home. In exchange for the loan, you pay the bank interest and promise to properly insure the home and pay the appropriate taxes. You make monthly payments to the bank to cover the interest and repay the principle.
Now let's say that by age 62 (minimum age to qualify for a reverse mortgage) you have repaid or nearly repaid your mortgage. You need an additional source of income. With a reverse mortgage, the bank gives you money, either in a lump some or payments. You retain title to the house and responsibility for paying property taxes and home owner insurance. The bank charges you fees for the funds, but you make no monthly payments. Instead, the funds and related fees are repaid at the time the home is sold.
A reverse mortgage may be right for you if your regular income is not meeting your cost of living; you have a fixed income and your home is your only asset; or you do not plan to bequeath your home in your will.
On the flip side, it may not be for you if you do want to bequeath your home, free and clear; or you have other, less costly ways to borrow money.
A reverse mortgage differs from an equity loan or equity line of credit in that there are no monthly payments or specified repayment date. However, the mortgage lender can require repayment if you fail to pay property taxes, maintain and repair your home, or keep your home insured.
The amount of money you can receive from a reverse mortgage depends on the specific program as well as your age and the value of your home. Fees can also vary.
If you still owe on your first mortgage, you must use the funds from the reverse mortgage to repay the initial mortgage, as the reverse mortgage must be the primary debt against the home.
Your total debt on a reverse mortgage is the sum of all the loan advances you have received plus any interest or fees. If that amount is less than the proceeds from the sale of your home, you repay the reverse mortgage and keep the difference. Your total debt is limited by the value of your home, so you can never owe more than what your home is worth. Reverse mortgage lenders may not seek repayment from your income, your other assets, or your heirs.
Because of the complexity of a reverse mortgage and the variations among programs, you should consult with an attorney, accountant, or tax advisor before committing to a reverse mortgage.
All applicants must discuss the program with a counselor from a HUD approved counseling agency.
Although a reverse mortgage may be a possible solution to produce a retirement income supplement by tapping home equity, we recommend that you use great caution whenever you consider converting your home equity into cash.
As the reverse mortgage market gains popularity, we urge you to discuss your retirement income needs with a professional financial planner not directly affiliated with any mortgage companies.
We are not recommending nor do we offer reverse mortgages. This article is provided for informational purposes only. American Reliance Group, INC. does not provide reverse mortgage loan services.