First a reverse mortgage is a lump sum payment or annuity that is
paid from a lender or insurance
company to supplement or provide income. As the homeowner you repay the
mortgage obligation when you sell or vacate the residence. When you die
your estate is responsible to pay back the loan. The amount owed will
never exceed the value of your home. If the home is sold and the proceeds
exceed the amount owed, the excess money goes back to you or in the case
of your death, your estate.
Further, when you buy a home with a reverse mortgage it is not
considered taxable income and does not affect Social Security or Medicare
A home equity loan on the other hand, is a mortgage loan that is secured
by the residual equity in your home. To calculate equity, you subtract
mortgage debt from your home value. Home equity loans allow a homeowner to
make repairs or other home improvements, refinance other debt, or use for
miscellaneous purposes. Unlike a home equity line of credit, a home equity
loan is an amortizing loan.
When you buy a home with a reverse mortgage you are paid
either a lump sum amount or annuity based on the amount of equity in your
home. For example, a monthly payment of $1,000 for the next 120 months
would be a 10 year monthly annuity.
Aside from programs which help you
home with a reverse mortgage there are various other types of reverse
mortgages. One type is for homeowners who want to tap into their equity
but not draw out the entire amount. Here an annuity or lump sum would be
paid out. Another reverse mortgage program is a home equity
conversion mortgage. Affiliated with FHA (the Federal Housing
Administration) this program combines the features of a home equity loan
and a line of credit. Here you receive a fixed payment and can also draw
on a credit line for additional cash.
The buy a home with a reverse mortgage
program uses the new home as a source of repayment. You make a down
payment and use the reverse mortgage loan for the rest of the
home’s purchase price. You
repay the loan with interest and other financing costs, when you sell the
home, no longer use it as a primary residence, or in the case of your
death, your estate would cover the outstanding loan. Most types of homes
in the housing market over the last few years has given many homeowners a
considerable boast in equity. As a result, some of these homeowners are
now looking to buy a home with a reverse mortgage.
Take for instance,
the homeowners who purchased their homes in the early 1960’s for a
modest price and now in their retirement years find their home has doubled
or even tripled in value.
With this kind of
equity to play with many homeowners are looking to buy a home with a
reverse mortgage. This could be a country home or a cottage property.
Or, the funds could even be used for luxury vacations, recreational
vehicles, boats – you name it!
If you were to buy a home with a reverse
mortgage you would be able to pay cash for the second ‘vacation’
home while continuing to live in your primary residence for as long as you
wish or are able. Once you die, your primary residence would be sold to
pay back your reverse mortgage loan, while the second home would
become part of your estate.
participate in these reverse mortgage programs, you and any
co-borrowers must be at least age 62. In order to buy a home with a reverse mortgage you also must have no mortgage debt on your home.
Further there are usually no income requirements to participate in the
above mentioned programs.
According to Fannie Mae, a positive feature
of reverse mortgage programs is that you’re never obligated for
more than the
loan balance or the value of the property, whichever is less; no assets
other than the home are used to repay the debt. A reverse mortgage
has neither a fixed maturity date nor a fixed mortgage amount.
If you’re seriously looking to
buy a home with a
reverse mortgage it’s important that you do your homework. Take the
time to comparison shop between lenders. Seeking the advice of at least
three reverse mortgage lenders is always wise.