Reverse Mortgage History and Basics
If you have heard great things about reverse mortgages but don’t really understand them, you aren’t the only one. Many people have no idea how such mortgages came about or how they work. Here are some reverse mortgage basics that can help you to understand them better and decide if you want them.
Reverse Mortgage Basics
Reverse mortgages are home loans designed to help seniors who are 62 and older stay in their homes, even when they have low incomes. If you are that age and have built up a lot of equity in your home over the years, you can convert that equity into cash. In fact, the government-insured programs that offer this sort of loan call it a “home equity conversion mortgage,” or HECM for short.
The reason this sort of loan is referred to as “reverse” is that a regular home loan would give you a lump sum of money. Then you would have to pay it back a little bit each month, much like making credit card payments. In this case, the opposite is true. The lender will give you money in a lump sum or each month. You won’t have to pay it back until you are no longer living in your house.
How These Home Loans Got Their Start
Reverse loans like this got their start in the United States in the state of Maine in 1961 when a woman found herself short her husband’s income and was worried about losing her home. She talked to a sympathetic lender who decided to experiment with giving her access to her home’s equity without monthly payments. Soon, a new home loan phenomenon was born.
By the 1980s certain laws were established to govern reverse mortgages. By the late 1990s the Department of Housing and Urban Development (HUD) had created their home equity conversion mortgage program. Over the years the program has changed in some ways, but the root idea remains the same. One major change is that you can’t take out a loan for the entire amount of your home’s equity anymore. You are only entitled to a certain percentage of it.
How HECM Proceeds Are Generally Used
You can use your loan money for almost any purpose, but most people use HECM proceeds to pay off medical bills, fund necessary home improvements, or pay monthly bills in times of financial trouble. Other options you have include padding your retirement income, setting up emergency funds for unforeseen expenses, and simply using them as a means of avoiding paying a monthly mortgage.
Paying Back a Reverse Mortgage
Paying back a reverse mortgage is a little complicated. Most people never do it in their lifetimes, but what’s a reverse mortgage payment process actually like is certainly a question that you need to ask. What typically happens is that, when you move or die, the loan comes due. If you move, the lender will take possession of your home and sell it. Proceeds will be used to pay back as much of the loan as possible. The lender will absorb the rest of the cost, unless there is a positive balance. If there is, that extra money will go to you.
In the event that you die before the loan is paid off, things will be more complicated. Your family will have to pay the full balance of the loan within a few months or vacate the property. If they vacate, the lender will sell your home. Again, leftover money will go to your family, but if there is still a balance owed on the loan even after the sale, your family will not be responsible for it. The lender will absorb those costs. So, before you apply for the loan, be sure that your family understands all of that fully.