Reverse mortgages come in many forms as more and more lenders consider other creative ways to lend to the elderly who have less cash but are “asset-rich”. A lot of controversy has surrounded reverse mortgages in the recent years as more and more people worry about their retirement incomes and the real estate market hits more uncertain times.
A reverse mortgage is a personal loan that a senior citizen usually 62 years old or more takes out on the existing equity on their home. There is no repayment and no danger of a foreclosure in the event that there is a default and this is one of the great benefits of a reverse mortgage. Instead of the borrower paying monthly payments to a lender who can repossess the property in the event that the loan is unpaid, the lender in a reverse payment makes the payments to the borrower instead.
In a reverse mortgage scenario, the borrower remains in the home and in possession of the title but he or she is still responsible for the property taxes, the utilities and general upkeep of the property including repairs. Once the loan term is over, the borrower or their heirs must repay the loan plus interest. In many cases, the lender is not interested in the property but to be paid their due amount in full.
The loan amount is determined by the age of the borrower, the prevailing interest rates and the payment option the borrower has elected. If a borrower elects a line of credit type of loan, he or she will receive a larger amount than if he or she elects a lump sum payment. Generally, the older a borrower is the more likely he or she is to get more. Other factors that determine the amount of the loan are the general price and closing costs of other homes in the area where the borrower lives. With falling home prices, the amount of reverse mortgages is also bound to take a nose-dive. This as we have seen, is the result of lenders appraising home values at the general price of homes in a certain areas or city.
The reverse mortgage has some safeguards which protect seniors. For instance, even with rising interest rates, the amount of the loan to be repaid cannot surpass the total value of the home. If the total amount of the loan is less than the actual value of the house at the time of the loan termination, then the borrower gets to keep the balance.