The Reverse Loan Mortgage - Is It Right For You?

By Michael VanDeMar

When looking into ways to pay off bills that have become overburdening, or purchasing a few needed items outside of the current budget, often times people will consider taking out a personal loan or a second mortgage on their home. However, for seniors who own their homes (over the age of 62 in the U.S.), there may be another option available. A reverse loan mortgage uses the equity in a person's home, and the loan does not have to be paid back as long as the owner remains living in the house. The reverse loan mortgage works great for those who qualify and are in need of cash to fix up things around the house, pay off debts, or would just like to have a little extra on hand to spend.

To take out a reverse loan mortgage in the U.S, the homeowner must be over the age of 62. The reverse mortgage must be the primary mortgage on the house (holding the first position under lien holders), which means that any other mortgages must be paid off, although the proceeds from the reverse mortgage may be used to do that. There are certain restrictions on the property that must be met as well. Homes that qualify include:

• Single-family homes
• Townhouses
• Condominiums
• Manufactured homes built after 1976

The reverse loan mortgage is very different from the typical mortgage in that income is not used to determine whether or not a person qualifies for the loan. The reason is that there are no monthly payments associated with paying it back. Repayment of the loan does not happen until the homeowner is no longer living there. There is no worry about late payments or losing the home due to defaulting on payments.

The monies from a reverse mortgage can be received as either a line of credit (which is the most popular option), a lump sum, or as distributed monthly payments. Depending upon what type of reverse mortgage program that is obtained, the amount of money the homeowner can borrow varies. Some factors taken into consideration are the borrowers age (youngest age if it is a couple borrowing), current value of the home, lending limits that might be imposed based on the area, and interest rates. It should be kept in mind also that the costs associated with a reverse mortgage from the private sector tend to be slightly higher than the costs associated with other types of mortgage loans. Due to this, if the homeowner is planning on remaining in the home for less than 5 years, it may be more cost effective to pursue other options.

In the case of a Home Equity Conversion Mortgage (HECM) which is FHA-insured, the homeowner must first receive counseling. This is built into the program in order to protect the consumer. Conducted by a HUD-approved third party, this process insures that the homeowner is fully aware of all that is involved with the reverse mortgage and any alternative options they may have. This counseling may be done in person or over the phone, but must be done before applying.

While reverse mortgages aren't ideal for everyone, the benefits do make them ideal in certain situations. For seniors who have the majority of their home mortgage paid off, or who own their homes free and clear, but are possibly cash-poor, reverse loan mortgages may be the solution they are seeking to help with home repairs or the need to supplement what may be limited fixed incomes.