Reverse mortgages let you use your house as a piggy-bank?
Reverse mortgages will gain popularity as more baby boomers are approaching retirement. This kind of loan is indeed the opposite of a regular mortgage as it allows seniors to borrow against the equity in the house. Debt does not have to be repaid as long as the senior lives. The heirs will inherit the remaining part of the equity in the house.
Unlike the traditional mortgage, in the reverse mortgage, the home owner is able to receive payments rather than make them. The form of the payments is up to the owner: it can be a lump sum payment, fixed monthly payment, line of credit or as a combination. Interest is each month subtracted from the home equity balance.
This form of mortgage was initiated by the US Department of Housing and Urban Development in 1989 and is a federally-insured private loan. It allows many seniors to complement their income and remain to live in the house. Nothing happens to the house where they live, and they do not have to repay any debt. However, the balance on your mortgage can never surpass the value of the house. Homeowners never need to worry about the size of their balance unless they decide to sell the house, as then the balance on the loan becomes payable.
The Home Equity Conversion Mortgage remains the most popular type of reverse mortgage.
The reverse mortgage has its downside too. First, only those aged 62 or older can qualify. Besides, retirees willing to take advantage of this option have to pay high start-up costs as they have to insure the loan.
One does have a maximum loan amount on a reverse mortgage that is derived primarily from consideration of the four factors: the age of the youngest borrower, the location and value of the home and the current interest rate. There is a requirement that the home must be occupied as a primary residence for the greater part of the year. The range of eligible properties includes town homes, detached homes, condominium units, planned unit developments and some manufactured homes. Besides, one has to own the house free and clear, or have only a small amount of mortgage pending.
For consumer protection, all who want to take out such a mortgage will have to participate in a free educational session with a HUD-approved counselor that will allow them to decide whether this is the best option.
The main obstacle for many people to tap into home equity is the fact that they will have to deplete the property they want to leave to their relatives. Besides, one has to think about the high cost of the loan if one wants to move on in a year or two. But, on the contrary, one has to think about the possibility to pay off medical expenses without turning to other sources.