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Mortgage paymentReverse mortgage is a type of loan that is a term used for senior citizens of America (62+) who are homeowners and want to convert part of the home equity into tax-free income, yet not having to sell the home or give up title, or take on a new monthly mortgage payment.
Reverse mortgage is called so because the payment method is reversed, which means, unlike regular mortgage rule, where monthly payments are made to a lender, in reverse mortgage, a lender makes payments to you. There are certain property types which can be considered eligible for reverse mortgage. Such property types include single-family homes, manufactured homes that have been built after June 1976, qualified condominiums, and townhouses.
Where can you use of Funds
Reverse mortgage is a practice followed for the benefit of senior citizens of US, who can use the fund raised from reverse mortgage for just about any purpose. The purpose of using the valued received from reverse mortgage can be anything ranging from supplementing retirement income to cover daily living expenses to home repair, health care expenses, debt repayment, vacation, making an investment etcetera.
For elderly people, the qualifying criteria for being eligible for Reverse mortgage are also quite relaxed.
You do not require any job proof or medical fitness to qualify. All you need to qualify for is, gaining a large enough value from your reverse mortgage, so that you can pay off an existing mortgage if any.
There are options which one can avail for accepting the sum received from reverse mortgage.
You can opt for getting a lump sum of money from your reverse mortgage
Or as a fixed monthly payment that will last till your life time
As a line of credit
The payment may be worked out as a combination of any of these also.
Though all the mentioned options are equally viable, the most popular option that is however, chosen by the majority of the reverse mortgage borrowers (60%) is the line of credit, which allows them to draw on the loan proceeds at any time.
Age is the most important variable which determines the amount of money you get from a reverse mortgage. The age is dependent on the age of the youngest borrower in case of couples going for reverse mortgage option. The amount of payment also depends on the appraised home value, current interest rates, and the lending limit that has been fixed in your area. Generally, the value of the house depends on your age-wise seniority. The older you are the more valuable your home is considered to be and hence the amount of payment from reverse mortgage is more.
There are Three Types of Reverse Mortgages
Basically, there are three types of reverse mortgage which are:
(i) Single-purpose reverse mortgages: These are mortgages which are generally offered by some government agencies (state and local) and nonprofit organizations.
(ii) Federally-insured reverse mortgages: These are referred to as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD)
(iii) Proprietary reverse mortgages: Private loans
Single-purpose reverse mortgages generally have very low costs but are available for only specified purposes as set by the government or nonprofit lender. The qualification criteria for this loan are low or moderate level of income of the incumbent.
Home Equity Conversion Mortgages and proprietary reverse mortgages are generally more expensive than any other home loans. As the up-front costs are generally high, this kind of a reverse mortgage may come as most expensive if your duration of stay in your house is for a short time. Unlike single-purpose reverse mortgages, the HECMs are widely available, do not require any income or medical documents, and can be used for any purpose.
There are however some rules for applying. As the website on reverse mortgage http://www.ftc.gov/bcp/conline/pubs/homes/rms.htm, states, Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. When at this job, the counselor must explain the loans costs, financial implications, and alternatives. The counselors need to let you know about government or nonprofit programs for which you may qualify, and any single-purpose or proprietary reverse mortgages that may be available in your area.
The amount to be borrowed with a Home Equity Conversion Mortgages or proprietary reverse mortgage can be high; but it depends on several factors like:
Your age
The type of reverse mortgage you select
The appraised value of your home
Current interest rates
Area where you live.
In a nutshell, it has been seen that in general, the older one is the more valuable ones home is considered to be and there is less of debt on it, thus rendering the property more valuable for gaining a reverse mortgage amount.
to proprietary loans, HECM advantage are two fold: First, they provide larger loan advances, and secondly their rate of interest is lower. However, in case of a proprietary reverse mortgage, owners of higher-valued homes are liable to get bigger loan advances. Location of your stay is only one part of the determining factor of the appraised value.
However, there are some disadvantages of Reverse Mortgage
The most serious weakness of reverse mortgages is its high upfront costs. Other than just depending on reverse mortgage, some individuals may want to consider other options to tap their home equity, especially if they decide not even to stay at their home for as less as 7 years.
Other options that can be conducive yet avoiding the high upfront costs of a reverse mortgage include:
Intra-family loan or sale-leaseback
Selling and moving to a less expensive dwelling or location
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