Reverse mortgages can help homeowners in their 60s and older stay in their house and tap some of their equity to live on. Many potential reverse-mortgage borrowers have questions about the loans, particularly if they have seen friends or relatives run into problems.
Tim Nelson of Scottsdale-based V.I.P. Mortgage is an expert on reverse mortgages and a Certified Reverse Mortgage Professional.
Here are his answers to some commonly asked questions.
Question: Please explain what a reverse mortgage is. Who is eligible?
Answer: Reverse mortgages allow homeowners 62 or older to convert part of their equity in their home into tax-free income. Monthly payments are avoided on a reverse mortgage because the interest accrues on the loan and is added to the total amount owed, instead of making monthly payments to the mortgage company. You can take out the equity in a lump sum, monthly payments, line of credit or a combination of these three options.
Q: How do reverse mortgage work?
A: The borrower accesses the equity in the home, and the loan amount and interest begins accruing because the borrowers are not making payments. As long as borrowers live in the home and pay property taxes and homeowners insurance, they do not have to make any payments. When the borrowers no longer occupy the property, they are required to sell the home and pay off the amount owed. So, basically the lender collects the money at the end — the amount of money that was borrowed and the interest that accrued.
Q: What happens when the borrower moves out of the home?
A: When all borrowers no longer occupy the home, there are generally three options.
• The home is sold. The borrowers have six months to sell and can request two 90-day extensions. At the time of the sale, the mortgage is paid off and the remaining equity belongs to the borrowers.
• When the borrowers pass away, the home goes to the heirs. The heirs can sell the home. The remaining equity is a part of the estate and divided up according to the will or trust.
• In most cases, the heirs sell the home. But the heirs could keep the home and pay off the reverse mortgage or refinance the balance into a traditional mortgage and make payments going forward.
If the home cannot be sold at the end for the amount that is owed on the home, the borrowers and the heirs are not responsible for the deficiency balance.
Q: What are the reasons a borrower might choose a reverse mortgage?
A: Several reasons, including:
• Help to supplement retirement income and extend the life of their retirement portfolio. With people living longer and fewer people retiring with pensions, the home equity is a great supplement to retirement income.
• Unexpected medical expenses.
• Home improvements and repairs.
• In-home health-care services. Many people want to age in place; the equity in their home can be used for the expense of in-home health care.
• When people downsize, using a reverse mortgage to purchase a home allows the buyer to finance a part of the purchase and still not have a mortgage payment.
• Using a reverse mortgage to purchase a home lets the buyer retain more cash and be more liquid rather than tying up a lot of money in a free-and-clear home. When you are retired, having more liquidity may be more important than having money tied up in the equity of a home that cannot be accessed.
Full Story can be seen here: http://www.azcentral.com/story/money/real-estate/catherine-reagor/2014/06/06/questions-reverse-mortgages/10077817/
Source: Arizona Republic