by Mike Mahoney of http://www.HomesinBostonMass.com
I recently was asked what is an a reverse mortgage by a client, so I thought I would take a moment to write about what these are. I took some of the information reverse mortgages from Wikipedia, but have provide a nice infographic on reverse mortgages.
A reverse mortgage is a form of equity release (or lifetime mortgage). It is a loan available to home owners or home buyers over 62 years old, enabling them to access a portion of the subject home's equity. The home owners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof.
In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance.
Title to the property remains in the name of the homeowners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home in some areas. However most lenders do not like to take a second or third lien position behind a reverse mortgage because its balance increases with time. It is rare to find reverse mortgages with subordinate liens behind them as a result. A reverse mortgage may be refinanced if enough equity is present in the home, and in some cases may qualify for a streamline refinance if the interest rate is reduced.
A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing.
If you need a referral to a lender who can do a reverse mortgage, please let me know. I will pass your name along to Thea Simolari of the Mortgage Network
If you need to know the value of your home to make a determination about possibly getting a reverse mortgage or deciding to sell, you will want to check out What is my Boston Home Worth on my www.HomesinBostonMass.com web site.
You can call me @ 617-615-9435
By Mike Mahoney
Boston area Realtor®
Affiliated with Century 21
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