Reverse home mortgage is a special type of private home loan for special type of people, the elderly senior citizens of America. This loan enables seniors to take advantage of the equity accumulated in their homes into cash, thereby reducing their monetary dependence on near ones. Reverse home mortgage enables senior citizens to access the equity in their homes into tax-free income, without the hassles of a monthly payment schedule. This type of loan is meant primarily for senior citizens to enable them to lead a dignified life without financial problems. The income from a reverse mortgage apart from being tax-free also does not affect Social Security payments or Medicare benefits. Furthermore the lender does not take ownership of your home, you retain the title to your home when you have availed of reverse mortgage. If you pay your property taxes and insurance diligently then the lender cannot foreclose on you. Payment can be had by different methods such as a one time lump sum, or regular monthly amount, or as a credit line account.
A 76-year old widow in Oakland, California has a home worth $1,000,000 with a current mortgage balance of $218,000. She needed money to make some repairs in the house, the expense of which could not be covered by her Social Security payment. A reverse mortgage paid off the $218,000 mortgage balance, and put $39,000 in her kitty at close of escrow, which she used for repairs. A credit line was created for the amount of $81,000 that will appreciate at 5% per year rate.
All these factors determine the Total Annual Lending Cost (TALC) as stated by the US Federal Government Regulation 2.
There are three main types of reverse home mortgages with similar terms and qualifying conditions, only the loan amount sanctioned and interest rates differ. Further Reverse Mortgages are either Federally insured reverse mortgages, Government sponsored or Private reverse mortgages.
The Government of the United States regulates all fees payable on a Reverse home mortgage.
Once the loan is passed, payment can be taken in any form:
Tenure: Tenure is available as equal monthly installments as long as the borrower resides in the house.
Term: Available as fixed monthly payments for a fixed period of time.
Credit Line: Credit Line type of payment is not scheduled and can be taken as need arises.
Modified Tenure: Modified Tenure combines credit line with monthly payments as long as the borrower resides in the house.
Modified term: Modified term is a combination line of credit with monthly payment for a fixed period chosen by the borrower.
In a reverse home mortgage no loan payments are made for the term of the reverse mortgage loan. As such the loan balance increases over the years. In most locations the equity in the house appreciates at a faster rate than the loan balance. Thus the total worth of the house increases. If the borrower passes away or decides to sell the house the loan becomes due. If the borrower sells the house the reverse mortgage loan is paid off with the sale proceeds and he keeps the remaining equity. In the event of death of the borrower, the heirs have up to a year to sell the house and pay off the reverse mortgage or refinance the house. In case they sell after loan repayment the heirs share the remaining amount.
Case study : In April 2006 in California a 78-year old single man applied and gained a reverse home mortgage loan. The total worth of his home after appraisal was put at $550,000 and the loan balance after close of escrow was $244,192. Equity at the beginning of the loan was $305,808. At a calculated 8% appreciation, after 5 years the worth of the home is $808,130 and the loan balance will be $346,275 at 6.27% interest rate. Remaining equity after 5 years is $461,856.
With the help of reverse mortgage the senior citizen can take care of his expenses and other monetary needs. The heirs are secure in the increasing equity of the home.