The reverse mortgage has become a helpful tool for senior citizens who want to stay in their homes while accessing the equity they have built up over years of mortgage payments. As with most financial tools, this product needs to adapt to economic conditions, and recent and upcoming changes will do just that.
How It Works
A reverse mortgage, also known as a home equity conversion mortgage (HECM), lets homeowners receive a lump sum, line of credit or monthly payment from the equity in their home. The homeowner retains ownership of the home, and the mortgage is paid back when the homeowner vacates the home permanently and the property is sold.
There are two types of reverse mortgage loans: the standard loan, under which the borrower can receive between 56 and 74 percent of the home’s value and pay a variable interest rate, and the saver loan, under which between 52 and 59 percent of the value can be borrowed at a fixed or variable rate.
The funds from a reverse mortgage can be accessed in several different ways:
- Tenure allows for equal monthly payments made to homeowners for as long as they live in the home. The amount is based on the age of the homeowner (the youngest, if it is a couple) and the amount of equity in the home
- Term pays the homeowner a set amount each month for a specified length of time
- Modified tenure means the owner receives equal monthly payments for life, plus a line of credit
- Modified term pays out monthly for a fixed amount of time plus a line of credit
- Line of credit gives the homeowner access to a specified amount as needed
Change comes to reverse mortgages
The decline in the housing market has affected reverse mortgages, so the Federal Housing Authority (FHA) has adjusted the terms of the reverse mortgages it offers.
As of October 2013, the FHA has set limits on the amount of money that a reverse mortgage borrower can withdraw in a lump sum. It has also limited the monthly payment amounts in the first year in an effort to preserve more money for the life of the loan.
In addition, the FHA will perform a financial review of the borrowers to make sure that they can meet other obligations related to the home, such as insurance and real estate taxes. If the review warrants it, the FHA may require that the homeowner set aside a portion of the proceeds from the reverse mortgage to cover these obligations.
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