Reverse mortgage is a type of loan available to older homeowners. This mortgage has been introduced with the aim to make retired senior citizens self-dependent. It requires no repayment as long as a borrower lives. But you have to pay if:
- You die,
- You shift house, or
- You sell the house
Not everyone can apply for a reverse mortgage. You must fulfill the following criteria:
- You must be at least 62 years old .In case of a co-borrower, the youngest
partner must be at least 62.
- You must be owner of the house you place as collateral.
- You must reside in your house throughout the term of the mortgage.
- The house must not be a mobile or a co-operative.
- The house must have no liens attached
There are two types of reverse mortgage. They are:
- Home equity conversion mortgage. (HECM)
- Fannie Mae home keeper mortgage.
Key Features:
- Reverse payment stream
It has a reverse mode of payment. Instead of borrower making payments to a lender, here a lender makes monthly payments to elderly borrower.
- Financial life line
It acts as a financial life line for elderly home owners. The income earned from the reverse mortgage can be used as one desires. One can use it for paying off medical bills, home improvements or even for your much longed for holiday.
- Steady stream of income
It provides equal monthly payments to elderly home owners. It helps one to plan out your budget properly. With a fixed income from the mortgage, you know how much you can afford to spend. You don’t have to draw out your savings or mutual fund accounts for household expenses and other minor things.
- Equity usage
Here the elderly borrower can convert the equity in his/her home to meet expenses. Most of the senior citizens who opt for reverse mortgage are 'house-rich-and-cash-poor'. Thus this is one way to tap out the equity built up in your home.
- Unlike conventional mortgage
Opposite to conventional mortgage it does not require any repayment of principal, or servicing fees for as long as a borrower lives in his home.
- Expensive
It is more expensive than traditional loans. The cost of obtaining reverse mortgage can be very high.
- Non-recourse loan
The reverse mortgage is a non-recourse loan. This means that if one defaults, then the lender can only lay claim on his collateral, nothing else. If the income paid out monthly to the reverse mortgagors exceeds the sale value of the collateral, the lender is at a loss.
- Multiple payment schemes
You can avail of the income you earn from the reverse mortgage in the following ways:
- As a lump sum,
- In installments
- As a line of credit
- A combination of the above
- Tax deductible income
The income that you earn every month is tax deductible. So you can use it any way you like and not pay tax for the same.
- Heirs beware
If you have heirs to the collateral and want to leave them a part of the property, you must think twice. You are actually depleting your house of its equity value. When you die, your house will be sold to recover the loan balance and only what remains will go to your heirs. Sometimes the heirs have to pay from their pockets to recover the house.
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