Reverse mortgage loans are home loans that provide you with a cash payment that’s based upon your home’s equity. Repayment of the loan is usually deferred until you die, sell your home or move out of it (the specific rules depend upon where you live). However, if you don’t make monthly payments, interest will be added to your loan’s balance. This means that the loan’s value may grow to be more than your home’s value but you usually won’t have to repay this money.
In order to qualify for reverse mortgage loans you’ll need to be at least 62-years-old and own the property that you consider your principal residence. Any mortgage that you may already have on this property will need to be able to be paid off with your reverse mortgage proceeds. These loans follow FHA eligibility standards.
Before starting the loan process you will be required to take an approved counseling course. This is meant to protect you, but has fallen under criticism from the Consumer Financial Protection Bureau. Nevertheless, most people who seek out reverse mortgage loans are having financial issues, but want to stay in their home.
Size of the Loan
The amount of money that you can receive is known as your “principal limit.” This is based upon your maximum claim amount, age and expected average interest rate. It will be equal to either your home’s appraisal value or the maximum amount that HUD will insure, whichever amount is less. The amount is then multiplied by a principal limit factor that’s determined by HUD based upon your age and expected average interest rate. Things like loan costs, existing liens, taxes and insurance may be subtracted from your principal limit to determine your net principal limit, which is the actual cash value of the loan.
Interest rates are either fixed or adjustable. If they’re adjustable, the adjustment is typically made on a monthly basis. The note or accrual rate is used to calculate this interest.
Cash from Reverse Mortgage Loans
Most reverse mortgage loans will provide you with cash or a credit line that is based upon your home’s value. There’s several ways in which this can be distributed:
1. In a lump sum
2. A cash payment that’s made each month
3. A credit line
4. A combination of these
Taxes and Insurance
The IRS doesn’t consider this loan to be a form of income, but annuity advances may be partially taxable. However, Social Security and Medicare benefits aren’t directly affected as long as the funds are spent by the end of the calendar month in which they were received. Typically, funds for taxes and insurances are paid from an escrow fund by the homeowner. Failure to pay either of these will result in the reverse mortgage loan being defaulted upon. Fortunately, the interest isn’t charged until you pay the deductible at the end of the loan. This is because the money that you receive is considered to be a loan advance.