A reverse home mortgage differs from a refinance because it does not require the homeowner(s) to repay the loan. The lending institutions use the equity in the home to make cash payments to the homeowners with principal and interest. The lenders recoup the principal and interest when the house is sold.
FHA vs. Conventional Reverse Home Mortgage
Before making a decision for retirement options, it’s best to weight the pros and cons of a reverse home mortgage loan. If the homeowner decides that it is a viable retirement option, an FHA Revere Home Mortgage or home equity conversion mortgage (HECM), loan has guidelines to protect the homeowners.
The FHA wants the recipients of a HECM loan to understand the benefits, as well as the disadvantages of a reverse mortgage. Prior to the loan approval, it is a requirement that the recipients receive a counseling session with an FHA professional. Since an FHA loan is government secured, it provides more financial security against predatory lenders.
FHA Reverse Home Mortgage Qualifications
- Homeowner must be at 62 years old
- The home must be the prime residency of the borrower and the borrower must live in the home for the duration of the loan
- Single family home or up to 4-unit complex qualify
- Manufactured home must meet FHA requirements
- The property should be owned outright or have a small balance on the mortgage
- Cannot be delinquent on any federal debt
FHA Home Equity Conversion Mortgage Payout Options
The homeowner has several options to receive the proceeds of the loan. Payments can be made in equal monthly increments as long as the borrower occupies the home. The payments can also be set for a specific amount of months. Another option is to have a line of credit where cash can be taken out as needed. There can also be a combination of monthly installments as well as a line of credit.
How is the Payout Calculated for a Reverse Mortgage?
There are several criterion for determining how much can be taken out on a HECM loan.
- The age of the youngest borrower
- The amount of closing costs
- The amount of equity in the home
- The current interest rate
Generally, the higher the age of the youngest homeowner, the more that can be borrowed. If the equity in the home is used to pay the closing costs, the amount borrowed will diminish accordingly. The amount of equity in the home will also have a large affect on the amount that can be borrowed. Higher interest rates will a negative effect on the amount that can be borrowed.
There are rules that must be followed for a HECM loan. If certain rules are not adhered to, the loan may become due and payable. A reverse mortgage home loan is a major financial decision that should not be undertaken lightly. Research all the important facts about an FHA reverse mortgage. Listen carefully to a qualified HECM counselor before making a decision on a reverse mortgage home loan.
Source:
hud.gov
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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