What is a Reverse Mortgage?

At first the puzzling term, reverse mortgage, doesn’t seem to make much sense but it’s simply a home loan that provides cash payments based on home equity. Payment of the loan is then suspended until such time as the property owner sells, moves out or dies.
Not so long ago, the reverse mortgage was a shadowy product offered by a handful of no-name companies operating on the edge of respectability. The sector generated more than a little controversy and became to be associated with scams and fraud. But, like many products whose time has come, the reverse mortgage offers a helping hand to older Americans with homes that can be worth more than all their other savings, combined.
As more people approach retirement in the coming decades without the benefits of a private pension and with inadequate savings, they’re going to need some of that home equity back during their increasingly long lives.
Reverse mortgages explained
Unlike a conventional mortgage, where the homeowner makes a monthly payment to the lender, increasing their equity by the amount of principal included in the payment, a reverse mortgage does the opposite. With a reverse mortgage, the homeowner is not required to make monthly payments and interest is added to the loan’s balance.
The balance of the original mortgage has to be low enough that it will be paid off with the reverse mortgage proceeds. Theoretically, an ever-growing loan balance can end up being greater that the property’s value although the mortgagor is not commonly required to repay any excess over the home’s value.
Who benefits?
Over the next decade, with an aging population and greater longevity, it’s a predictable certainty that reverse mortgages will provide the answers for seniors facing financial difficulties or those who want to stay in their homes for the remainder of their lives.
Today the reverse mortgage business is gaining respectability with big name companies like BNY Mellon entering the field as a servicer and securitizer of the loans. The presence of reputable companies along with enhanced legal and regulatory requirements tightening up the sector will see reverse mortgages taking their place in the market.
Better guidelines
Beginning in March, 2015, FHA instituted a specific financial assessment for Reverse Mortgages; lenders are now required by FHA to do a much more comprehensive credit, income and asset underwriting.
Currently, to qualify for a reverse mortgage in the United States, the borrower must be at least 62 years old and must occupy the property as his or her primary abode. The prospective borrower has to participate in an information counseling session and the home must be maintained with needed repairs, property taxes and insurance.
Reverse mortgages follow FHA eligibility standards for property types, meaning FHA approved condominiums, PUD’s and most 1–4 family homes will qualify. Standard FHA guidelines will apply to manufactured housing.
Home equity is an asset but for some it may be an unaffordable luxury. For many older Americans, releasing some of that home equity can allow them to spend their golden years more securely. For them, a reverse mortgage is simply a financial tool, like any other.

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