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What is a Reverse Mortgage

Reverse Mortgage

In the past ten years, reverse mortgage loans have hugely increased in popularity. According to the U.S. Department of Housing and Urban Development (HUD), 7,781 of these loans were given in 2001. By 2009, the highest volume year to date, 114,692 loans were used by consumers. This remarkable increase in popularity has many consumers wondering what is a reverse mortgage?

A reverse mortgage is a loan that allows borrowers to withdraw a portion of their home equity. As the name implies, a reverse mortgage is basically a mortgage loan in reverse. Instead of a borrower making payments to his or her lender, the lender pays the borrower. The amount a borrower receives must then be repaid once the borrower passes away, sells the home, or is no longer living in the home. Due to the nature of these loans, it is not surprising that so many people are asking, "What is a reverse mortgage?"

What Is a Reverse Mortgage and Who Qualifies for These Loans?

Many consumers are also wondering whether they could qualify for one of these loans. To qualify for a loan, consumers must be at least 62 years of age, own their home, and have built a significant amount of equity in the home. The exact amount of equity one needs to qualify will depend on one's age.

There are also property requirements associated with these loans. To be eligible, borrowers must own a one to four unit home. One of these units must be used as the borrower's primary residence. FHA-approved condominiums and manufactured homes are also eligible. Vacation homes and investments properties are ineligible.

What Is a Reverse Mortgage Payout, and How Much Can Consumers Expect to Receive?

After asking, "What is a reverse mortgage?" many begin wondering what is a reverse mortgage payout? Payouts are calculated based on a borrower's age, equity, and interest rate. The value of a person's home will also impact the amount of money he or she is eligible to receive. However, at this time, the maximum claim amount for a Home Equity Conversion Mortgage is $625,500. These loans are insured by the federal government and make up the great majority of all reverse mortgage loans. The amount a borrower will receive also depends on the payment option he or she chooses. Borrowers can choose to receive their money in a lump sum, as a line of credit, in fixed monthly payments, or as a combination of these choices. People who choose monthly payments will also need to decide whether they want to receive their payments for a set term or until it comes time to repay the loan.

As with any type of loan, borrowers will be expected to pay interest on any amount they receive. These loans can be given adjustable or fixed interest rates depending on the payment plan one chooses. Borrowers will also be expected to pay closing costs, mortgage insurance premiums, and other fees.

Borrowers who find themselves asking, "What is a reverse mortgage?" will want to carefully consider whether a loan might be right for them. A reverse mortgage can be used to pay off one's mortgage loan, supplement one's income, or even help a person avoid foreclosure. These benefits are what have propelled reverse mortgage loans in popularity over the past several years.

There are three types of reverse mortgages available, all with their own advantages and disadvantages.

These are:

1. Single Purpose Reverse Mortgages - Typically offered by state and local governments, these are low-cost loans available to low to moderate income homeowners. The use of the loan is for specific purposes, such as home repairs or for paying property taxes.

2. Home Equity Conversion Mortgages or HECM - These are federally insured loans backed by insured HUD. While more costly than other reverse mortgages, they are widely available, not limited to specific income requirements and maybe used for any reason at all.

3. Proprietary Reverse Mortgages - Available through private lenders, the loans may be used for any purpose, but are generally associated with higher fees.

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