A Reverse Mortgage or Home Equity Conversion Mortgage (HECM) is a loan that enables homeowners 62 years of age or older to convert a portion of their home equity into cash. It may also provide a way for those with limited income to better manage their retirement finances by allowing them to use accumulated equity to cover living expenses.
As long as you live in the home, you’re not required to make monthly mortgage payments, only taxes, insurance and HOA if required. Instead, the lender makes monthly payments to you. That’s why it’s known as a reverse loan because with a traditional mortgage it’s the other way around, the borrower pays the lender. In this case, the borrower is not required to pay back the reverse loan until the home is sold, vacated, or the owner passes away; and the homeowner still retains ownership of the home. However, you must remain current on property taxes, hazard insurance, homeowner’s association dues, any other applicable fees, and you must be able to maintain the property.
- No FICO qualification
- No debt-to-income ratios - though borrowers must demonstrate a willingness and capacity to pay basic obligations
- Provides greater freedom in retirement - you aren’t restricted on how you can use the loan proceeds and it is non-taxable income
- No debt is assigned to your heirs when the loan becomes due. Instead, the family is given a period of time to pay off the loan or sell the home. In addition, family members/heirs are given the opportunity to buy the property for 95% of the appraised value, even if the house is worth less than the amount owed
- A reverse purchase can help a borrower retain their savings, improve their monthly cash flow, and / or finance a purchase that would normally be beyond their budget
- It can help seniors relocate to a different region or to move closer to family
- It can also help seniors move into a more affordable home that requires less maintenance, or better serves their physical needs by providing features like handrails, wider doors, or a single-story layout
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