The reverse mortgage is simply a very flexible loan that gives homeowners the ability to control when and how they convert home equity into cash.
When you purchased your home, you used your income to repay debt, and this built up equity in your home. With the reverse mortgage, you are taking this equity out of your home in cash. The lender sends you cash, and you make no monthly mortgage payments, so the amount you owe (your debt) gets larger as you get more cash and more interest added to your loan balance. As your debt grows, your equity shrinks.
A reverse mortgage is a non-recourse loan that uses the home's equity as collateral. Being non-recourse, the home effectively owns the loan so the borrowers' heirs and estate can never owe more than the value of the home.
Reverse mortgages come with a period called "the right of rescission" which is basically a cooling off period. Borrowers have 3 business days after the closing paperwork has been signed to change their mind with no questions asked and no penalty. If a borrower wants to get out of the loan after a period of time - see the section below about paying off the loan early.
There is no average amount of money that a borrower can get from a reverse mortgage. The amount of money or the loan proceeds depends on 3 factors: the age of the youngest borrower, the current value of the home and your interest rate. As of 2020, the maximum amount that can be paid from a HECM mortgage is $765,600.
Homeowners 62 and over with substantial equity in the home may qualify for a reverse mortgage. Borrowers must be creditworthy and cannot be delinquent on any federal debt. Borrowers must also successfully complete HUD approved loan counseling.
The amount of home equity needed to get a reverse mortgage depends on the age of the youngest borrower. At age 62, the borrower needs roughly 50% equity with this percentage decreasing with age. However, a borrower can get a reverse mortgage when they don't have the balancing equity to support the loan - just as long as they are able to make up the difference by bringing additional cash to the loan closing.
Provided that the borrower remains current with property taxes, insurance and maintains the home, the reverse mortgage becomes due when the borrower leaves the home for 12 consecutive months, sells the home or dies. As with forward home loans, there is a loan servicer that manages the loan account. The borrower has the option to pay off the loan or any portion he/she desires anytime before the loan comes due by working with the loan servicer.
The reverse mortgage comes due 12 months after the last borrower dies. The heirs or estate pays of the loan which can be paid with the proceeds of the home sale if desired. The value in excess of the loan belongs to the heirs or estate. If the loan balance is more than the value of the home the non-recourse feature protects the heirs and/or estate.
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Important Disclosure Information
Mutual of Omaha Mortgage, Inc., NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108.
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Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.
These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. For licensing information, go to: www.nmlsconsumeraccess.org