California Reverse Mortgages
A reverse mortgage is a special type of loan made to older homeowners
to enable them to convert the equity in their home to cash to finance
living expenses, home improvements, in-home health care, or other
needs.
With a reverse mortgage, the payment stream is "reversed."
That is, payments are made by the lender to the borrower, rather
than monthly repayments by the borrower to the lender, as occurs
with a regular home purchase mortgage.
A reverse mortgage is a sophisticated financial planning tool that
enables seniors to stay in their home -- or "age in place"
-- and maintain or improve their standard of living without taking
on a monthly mortgage payment. The process of obtaining a reverse
mortgage involves a number of different steps.
The first, most widely available reverse mortgage in the United
States was the federally-insured Home Equity Conversion Mortgage
(HECM), which was authorized in 1987.
A reverse mortgage is different from a home equity loan or line
of credit, which many banks and thrifts offer. With a home equity
loan or line of credit, an applicant must meet certain income and
credit requirements, begin monthly repayments immediately, and the
home can have an existing first mortgage on it. In addition, there
is no restriction on the age of borrowers.
In general, reverse mortgages are limited to borrowers 62 years
or older who own their home free and clear of debt or nearly so,
and the home is free of tax liens.
Borrowers usually have a choice of receiving the proceeds from
a reverse mortgage in the form of a lump-sum payment, fixed monthly
payments for life, or line of credit. Some types of reverse mortgages
also allow fixed monthly payments for a finite time period, or a
combination of monthly payments and line of credit. The interest
rate charged on a reverse mortgage is usually an adjustable rate
that changes monthly or yearly. However, the size of monthly payments
received by the senior doesn't change.
Some reverse mortgage products also involve the purchase of an
annuity that can assure continued monthly income to the senior homeowner
even after they sell the home.
The size of reverse mortgage that a senior homeowner can receive
depends on the type of reverse mortgage, the borrower's age and
current interest rates, and the home's property value. The older
the applicant is, the larger the monthly payments or line of credit.
This is because of the use of projected life expectancies in determining
the size of reverse mortgages.
Seniors do not have to meet income or credit requirements to qualify
for a reverse mortgage.
Unlike a home purchase mortgage or home equity loan, a reverse
mortgage doesn't require monthly repayments by the borrower to the
lender. A reverse mortgage isn't repayable until the borrower no
longer occupies the home as his or her principal residence.
This can occur if the sole remaining borrower dies, the borrower
sells the home, or the borrower moves out of the home, say, to a
nursing home.
The repayment obligation for a reverse mortgage is equal to the
principal balance of the loan, plus accrued interest, plus any finance
charges paid for through the mortgage. This repayment obligation,
however, can't exceed the value of the home.
The loan may be repaid by the borrower or by the borrower's family
or estate, with or without a sale of the home. If the home is sold
and the sale proceeds exceed the repayment obligation, the excess
funds go to the borrower or borrower's estate. If the sales proceeds
are less than the amount owed, the shortfall is usually covered
by insurance or some other party and is not the responsibility of
the borrower or borrower's estate. In general, the repayment obligation
of the borrower or borrower's estate can't exceed the value of the
property.
In general, a borrower can't be forced to sell their home to repay
a reverse mortgage as long as they occupy the home, even if the
total of the monthly payments to the borrower exceeds the value
of the home.
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