Many senior adults make use of reverse mortgages as a means of generating some additional revenue during their retirement years. In order to manage this type of financial arrangement, it is necessary to own a principal residence that serves as the permanent home for the individual or couple applying for the reverse mortgage. If you are considering this type of arrangement, here are some things you need to know about the relationship between as reverse mortgage and your primary place of residence.
It’s important to understand exactly what a reverse mortgage is. Sometimes referred to as a lifetime mortgage, this financial arrangement is essentially a loan to seniors who have title to the house where they live. The lender purchases the equity in the property and issues either a line of credit, a lump sum payment, or a series of payments to the seller. A reverse mortgage is repaid either by allowing the lender to secure full title to the property once the owner has passed away, or by the sale of the home, with the proceeds from the sale used to retire the loan. In situations where the owner is moved into a nursing home or other care facility on a permanent basis, the loan comes due and must be settled either by surrendering the deed to the lender or by paying off the loan by other means.
Some people are surprised to learn that lenders generally do not approve a reverse mortgage unless the property involved is the permanent residence of the owner. It must be proven that the home is occupied by the recipients of the mortgage for the vast majority of the calendar year. While the seniors are free to own a vacation house or to travel for several months a year, the property used to secure the reverse mortgage must be their legal and permanent residence according to such documents as tax records, utility bills, and other legal records.
Not all principal residences will qualify for a reverse mortgage. For example, a mobile home may be the permanent residence, but the chances of being approved are very slim, unless the home is secured to a permanent foundation and is not past a certain age. Homes that currently carry a lien of some type may or may not be considered for a reverse mortgage, depending on the specific circumstances involving the lien. In any event, all claims to the property such as liens or existing mortgage must be retired before there is any chance of securing a reverse mortgage.
When calculating the line of credit or the loan amount that will be extended through the reverse mortgage arrangement, lenders will look at the current market value of the home, as well as the amount of equity the homeowner has in the property. If the property is currently valued at more than the loan limit set in place by the Department of Housing and Urban Development, commonly known as HUD, that factor will also influence the amount of the mortgage offer. The general condition of the home will also be considered, especially in terms of any repairs that the home currently requires, such as the replacement of old insulation or structural repairs that are necessary to ensure the safety of the occupants of the home. If there is a lien of any type, that will also impact the total amount that the lender will offer.
It is important to note that method of payment the homeowner chooses can also have some impact on the interest that is applied to the loan. Generally, a line of credit carries the lowest rate of interest. A lump sum payment is likely to carry the highest interest rate, while a series of monthly payments often involves an interest rate that is somewhat similar to the current rates of interest that apply to any type of mortgage.
Homeowners who are thinking of applying for a reverse mortgage would do well to familiarize themselves with current guidelines for this type of mortgage arrangement. This includes verifying the current age that the occupants of the home must be in order to qualify for the mortgage arrangement, the specifics in terms of the types of dwellings that are acceptable, and the requirements in terms of a clear and free title to the property. In the United States, it is necessary to receive information and counseling through an agency approved by HUD before committing to this type of loan arrangement. This is to make sure the owners of the property understand the nature of the reverse mortgage and what is required of them in terms of repayment of the loan.
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Wesley Pritchard is a freelance writer who writes about the mortgage industry, often focusing on a specific topic such as a reverse mortgage .
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