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Reverse home mortgage loans do not require repayment as long as the homeowner lives in the house. But the loan must be repaid in full, including interest and other charges, when the last living borrower dies, sells the home, or permanently moves away.
Reverse Mortgages
The value of a home can be turned into cash without having to leave the home or repay the loan every month. A reverse mortgage is a loan against the home in which the homeowner(s) does not have to pay as long as they live in that house. The loan amount can be paid to the homeowner in different ways:
- A single lump sum
- A regular monthly amount
- An account that lets the homeowner(s) decide when and how much of the available amount is paid to them
- A combination of the above methods
The reverse home mortgage amount need not be paid back until the homeowner dies, sells the home or permanently
moves out of the home. Most schemes require the homeowner to be of at least 62 years of age. There are no monthly payments to be made and an income is not required to qualify for this type of mortgage.
The disadvantage is that the debt increases and the home equity decreases. But this is not true in all cases. If the value of the home increases over time, the equity would increase. Also if there is only one loan advance and no interest is charged on it, the debt would remain the same.
Common Features of Most Reverse Mortgage Loans
- When the loan is over, the homeowner(s) or their heirs must pay back the loan amount plus interest. The homeowner must still pay the property taxes, insurance, and make repairs.
- The money obtained can be used to pay the various financing fees on the same loan. The amount may depend on the age of the homeowner, the home's value or the interest rate and closing costs.
- Before you apply for this mortgage, you must pay off any old debt on the property or use the money got from the mortgage to pay off the debt.
- The debt owed includes the loan advances and interest on the loan. Also, the homeowner cannot owe more than what the home is worth at the time the mortgage loan is repaid.
- A homeowner has three days to reconsider his decision of taking out the mortgage loan after the closing. If the homeowner decides he does not want the loan, he can cancel it.
The HUD (U.S Department of Housing and Urban Development) offers HECM (Home Equity Conversion Mortgage). This loan can be used for any purpose. Other state governments offer low-cost reverse mortgage loans that can be used for a specific purpose only, for instance, to repair the home or pay property tax. Some of these loan programs are available only to homeowners with low to moderate income. More expensive type of reverse mortgage loans is available from the companies who develop these programs.
The true total cost of a reverse home mortgage loan is difficult to compare because the loan costs vary greatly. The reverse mortgage lenders must disclose the Total Annual Loan Cost (TALC), under the federal Truth-in-Lending law. The TALC is just one way of calculating the costs.
Eligibility requirements:
- The homeowner and all co-borrowers must be a minimum of 62 years old.
- The home must have a very low mortgage balance or be owned free and clear.
- The owner must occupy the home.
The equity is calculated based on three factors:
- The youngest borrower's age
- The appraised value of the home
- The FHA maximum loan limit
Fees involved:
- Origination fee
- Appraisal fee
- Title fee
- Escrow fee
- Recording fee
- Monthly servicing fee
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