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Reverse mortgages part 1 -- the basics
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An older person with a large percentage of their net worth tied up in their house may need that money to live on or to pay a sudden large bill. A reverse mortgage gives an older homeowner access to their home equity without having to sell their house.
According to the National Reverse Mortgage Lending Association, an industry trade group, the Federal Housing Administration (FHA) insured a little over 115,000 reverse mortgages (technically, a “home equity conversion mortgage or “HEMC”) in the federal fiscal year that ended in September. That’s about 3,000 more than the FHA insured in 2008. Almost 11 million websites contain the words “reverse mortgage” according to Bing so there’s plenty of interest out there for this unique mortgage loan.
First, what is a “reverse mortgage”? A homeowner who obtains a reverse mortgage gets paid a portion of their home equity by a lending institution while they live in the house. In other words, a reverse mortgage is a loan against a home that doesn’t have to be paid back until the house is sold. This type of loan is sometimes called a “rising debt” loan because the money that a homeowner takes out of the house increases the amount of debt for the homeowner instead of decreasing the debt load that happens with a typical mortgage loan
To obtain a reverse mortgage, a homeowner must beat least 62 years old and use the home as their primary residence to be eligible. Generally, the home must be a single unit home (condos and mobile homes that meet FHA guidelines are also eligible). A reverse mortgages is repaid when the last surviving borrower dies, sells the home, or permanently moves out of the home.
The amount of money a homeowner can get out of his/her house depends on a number of factors such as:
- The value of the house
- Current amount owed
- The age of the borrowers
Congress raised the reverse-mortgage loan limit to $625,500 through the end of 2009. After that, the lending limit goes back to $417,000.
To find out how much you might be able to obtain as a reverse mortgage, use a reverse mortgage calculator like the one at this AARP site. As an example, a 65 year old couple living in the 98006 area code in a house worth $500,000 could get a reverse mortgage paid as a lump sum of $248,123 (roughly 50% of the home value).
Payments are made in one of several ways:
- Lump sum
- Monthly payments for a specific length of time
- Monthly payments for the borrowers’ lifetimes
- Line of credit that the home owner can draw on at any time
- A Combination of these options.
For more information on reverse mortgages, visit the reverse mortgage section of the AARP web site.
Next time: lenders, costs, scams and other considerations
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