Reverse Mortgages: It Pays to Know the Basic Facts

If you are an American senior citizen, undoubtedly you still have a lot of things in mind that you want to accomplish but are limited by the amount of cash you have. If you are physically healthy and active, you still want to travel and go to that vacation spot you always wanted if you had that extra cash. On the other hand, if you are the less active type, you need funds to spend on bills, home improvement and health care. Do you need that extra cash but don't know how to get it? If you are a homeowner, then there is a solution in sight.

What is a FHA reverse mortgage?

An FHA reverse mortgage is a loan insured by the U.S. government through its Federal Housing Administration or FDA, under the sponsorship of the US Department of Housing and Urban Development or HUD.

Every year, a growing number of older Americans are taking out reverse mortgages to fund their financial requirements. Reverse mortgages are a special type of mortgages for senior homeowners to draw on a part of their home's equity and convert it into usable cash without selling their homes or incurring more monthly expenses.

In home equity loans, equity is put back into the home every time a borrower makes a loan repayment; with reverse mortgages, equity is reduced every time the borrower receives money.

How does a reverse mortgage work?

Many older Americans are turning to reverse mortgage to assist them in their financial requirements. This could include money to spend on home repair or improvement, as a current mortgage payment, as an addition to their retirement pension, to fund their health care or even finance a much-anticipated vacation. Reverse mortgages, also known as lifetime mortgages, are ideal for "house-rich yet cash-poor" senior homeowners. It allows for the borrowers to still live in their residences and have money to spend for their financial needs.

Regular mortgage requires you to make payments every month to a lending company. In reverse mortgaging, the lending company provides you the cash each month. You are not required to pay it back as long as you hold residence in your home. The loan, however, is only rendered repayable once you sell the house you are living in, move to another residence or when you pass away. By no means will the lender take hold of the title deeds. It will always be in the possession of the homeowner.

As a reminder, the amount of the loan borrowed cannot go beyond the home's equity. If the borrower, for some reason, run short of funds to pay back the amount owed, the deficit will be filled in by HUD to the lending company. This is made possible thru the insurance premiums collected by HUD from all borrowers specifically for this purpose. The insurance premium has previously been deducted from the reverse mortgage payments that the borrower received.

What are the qualifications for a reverse mortgage?

Most lending companies require you to be at least 62 years old and living in your own home to qualify for the loan. If you are residing in a nursing home or confined in a hospital for up to one year, your loan will have to be repaid. Reverse mortgages require no income or credit checking and it is tax-free.

How much can you borrow?

Loan amounts depend on several factors:

· the home's equity value

· the home's location

· the rate of interest

· the borrower's current age

The loan you will borrow has a maximum allowable amount. Currently, the maximum allowable amount ranges from $200,000 to $362,000.

Who gets your house when you die?

Don't worry; it won't go to the lenders. The title deed is always in your possession. When you die, your heirs will be responsible for the reverse mortgage repayment.