Reverse mortgage is a loan against a house. It requires no repayment for as long as the borrower lives there. It is generally for people above 62 years old who owns a house. The purpose of this is just the same as the regular mortgage which is to help the borrower finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses. At present, more and more Americans are turning to “reverse” mortgages.

In a “reverse” mortgage, the borrower receives the money from the lender and generally don’t have to pay it back for as long as he/she live in the house. Instead, the loan must be repaid when the borrower die or when borrower sell his/her home, or he/she no longer live there as his/her principal residence. Reverse mortgages can help homeowners meet their financial obligations without selling their house.

The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions.

Home Loans vs Reverse Mortgage

* To qualify for most loans, the lender checks the borrower’s income to see how much he/she can afford to pay back each month. But with a reverse mortgage, there are no monthly repayments. So the income generally has nothing to do with approval of the loan or the amount of the loan.

* With most home loans, if the borrower fails to make the monthly repayments, he/she could lose his/her home. But with a reverse mortgage, there are no monthly repayments to make. So the borrower can't lose his/her home by failing to make payments.

Types of Reverse Mortgages

The three basic types of reverse mortgage are:
* single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;
* federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD); and
* proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.

Single-purpose reverse mortgages
* generally have very low costs butare not available everywhere, and
* they only can be used for one purpose specified by the government or nonprofit lender,
* for example, to pay for home repairs, improvements, or property taxes. In most cases, a borrower can qualify for these loans only if his/her income is low or moderate.

HECMs and proprietary reverse mortgages tend to be
* more costly than other home loans and the up-front costs can be high,
* generally most expensive if the borrower stays in the home for just a short time.
* widely available, have no income or medical requirements, and
* multipurpose or can be used for any purpose.

Before applying for a HECM, the borrower must meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan’s costs, financial implications, and alternatives. For example, counselors should tell the borrower about government or nonprofit programs for which the borrower may qualify, and any single-purpose or proprietary reverse mortgages available in the area.

The amount of money that can be borrowed with a HECM or proprietary reverse mortgage varies depending on different factors such as, age, the type of reverse mortgage selected, the appraised value of the home, current interest rates, and where the borrower live. In general, the older the borrower is, the more valuable for the home, and the less money owed on it, the more money can be borrowed.
The HECM gives the borrower choices in how the loan proceeds are to be given. It can be through fixed monthly cash advances for a specific period or for as long as the borrower resides in his/her home. Or the borrower can opt for a line of credit, which allows him/her to draw on the loan proceeds at any time in amounts that he/she chooses. The borrower can also get a combination of monthly payments plus a line of credit.

HECMs generally provide larger loan advances at a lower total cost compared with proprietary loans. But owners of higher-valued homes may get bigger loan advances from a proprietary reverse mortgage. That is, if the borrower got a higher appraised value without a large mortgage, then he/she may likely qualify for larger funds. Location (for example, the neighborhood) is only one part of the determination of appraised value.

Loan Features

Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. The borrower retains the title to the home and does not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.

When a home owner is considering a reverse mortgage, it is important that he/she is informed of the following:

* Origination fees and other closing costs for a reverse mortgage which lenders generally charge. Lenders also may charge servicing fees during the term of the mortgage. The lender generally sets these fees and costs.
* The amount owed on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount owed each month. That means the total debt increases over time as loan funds are advanced to the borrower and interest accrues on the loan.
* Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index will likely change according to market conditions.
* Reverse mortgages can use up all or some of the equity in the home. This may leave fewer assets for the borrower’s heirs. A “nonrecourse” clause, found in most reverse mortgages, prevents either the borrower from owing more than the value of your home when the loan is repaid.
* Because the borrower retain title to the home, he/she remains responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. So, for example, if the borrower doesn’t pay property taxes or maintain homeowner’s insurance, there is a risk the loan becoming due and payable.
* Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Getting a Good Deal

In order for you to get a better deal on a reverse mortgage shop around to compare your options and the terms being offered. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. It will help you ask more educated questions, which could lead to a better deal.

No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable.

Be cautious if anyone tries to sell you something, like an annuity, and suggests that a reverse mortgage would be an easy way to pay for it. If you don’t fully understand what they’re selling, or you’re not sure you need what they’re selling, be even more skeptical.

Keep in mind that your total cost would be the cost of what they’re selling plus the cost of the reverse mortgage. If you think you need what they’re selling, shop around before you buy.

No matter what the reason is to take a reverse mortgage, you generally have at least three business days after signing the loan documents to cancel it for any reason without penalty. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing.