The Origin of Reverse Mortgage Loans
Reverse mortgages started in the 1960s. They have changed form since then but the underlying principle is the same. Today most people consider reverse mortgages as a way to handle debt. The home acts as collateral on the loan. Homeowners are still responsible for homeowners insurance, property taxes and maintaining their home’s value. If they do not maintain the value of their home, the local lender can consider this a disqualification of the mortgage loan. This could cause the loan to be due before the full life of the loan.
The Reverse Mortgage Process
When people buy homes, they borrow money from my bank and then pay a mortgage every month. In the case of a reverse mortgage, the opposite occurs. The bank is actually paying the homeowners because they have equity in their home. Reverse mortgage only occurs when someone’s house is paid off and they have full equity in the home.
When the homeowner sells their home, moves or passes away, the lender sells the home to recover the amount of the reverse mortgage. If there is any equity left in the home, it goes to the homeowner or their descendants. The Federal Trade Commission has established that homeowners will never have to pay more than the value of their home if they outlive the term of the reverse mortgage.
The Conditions of a Reverse Mortgage Loan
Not every homeowner is eligible for a reverse mortgage loan even if he or she has full equity in their home. Reverse mortgage makes the most sense for homeowners who are 62 years old and do not plan to move from their home. Additionally, it makes sense for those who can afford to maintain their home because leaving the house in disrepair will most likely disqualify them from a reverse mortgage.
Different Types of Reverse Mortgage Loans
There are three main types of reverse mortgage loans:
Proprietary Reverse MortgageIn this case, an issuing company backs a private reverse mortgage loan. These reverse mortgage loans offer higher amounts then Home Equity Conversion Mortgages (HECMs) loans. This type of reverse mortgage loans is ideal for homeowners that have high value homes. These loans are not federally insured.
Single-Purpose Reverse Mortgage LoansMunicipal governments, nonprofits and state agencies offer these type of loans. These are ideal for moderate- to low-income homeowners. The lender makes the decision on how the reverse mortgage is used. For example, the lender may state that the reverse mortgage should only be used for house repairs.
Federal Reverse Mortgage LoansThey are the only types of reverse mortgage loans that are guaranteed by the federal government. They are usually known as HECMs. This is the most common type of reverse mortgage loans. These types of reverse mortgage come with restrictions on how they can be used.
There are three different types of reverse mortgage loans that help homeowners recoup some of the equity in their homes. It allows them to use the value of their homes as a debt instrument. These types of loans are a practical way for homeowners to earn money if they have full equity in their homes.