With a reverse mortgage, you borrow money using your primary residence as a guarantee for the loan, as you would for a traditional mortgage. Unlike a traditional mortgage, a reverse mortgage is repaid when the borrowers no longer live in the home.
Although you won’t make monthly mortgage payments, you’ll need to continue to pay property taxes and homeowners insurance, and keep your house in good condition. Because interest and fees are added to the loan balance each month, your loan balance goes up—not down—over time. As your loan balance increases, your home equity decreases.
Many people interested in a reverse mortgage still owe money on their home. If this is your situation, you will be trading one loan for another, usually a larger one.
Some of the money you borrow with the reverse mortgage will be used to pay off your current mortgage. If you owe a lot on your current mortgage, you may not have much reverse mortgage funds left over. However, a reverse mortgage will free up money you have been using to make monthly mortgage payments.
Term - monthly payments are made for a set period of time.
Tenure - monthly payments for the rest of the borrower's life.
or a Combination of the above options
Reverse Mortgage Interest Rates: How are interest rates determined for Reverse Mortgages?
Interest rates on reverse mortgages might be fixed or variable (adjustable). Fixed rates are constant throughout the duration of the interest accrual. Variable (Adjustable) rates are defined by an underlying index and a margin rate.
When the benchmark rate changes, the variable (adjustable) rate on a reverse mortgage may vary as well. This means that the rate might rise or fall in unison with the benchmark rate. As of February 1, 2021, GNMA uses Constant Maturity Treasury (CMT) to determine interest rates for adjustable rate mortgages (ARM).
According to Investopedia, “Constant maturity yields are often used by lenders to determine mortgage rates. The one-year constant maturity Treasury index is one of the most widely used, and is mainly used as a reference point or benchmark for adjustable-rate mortgages (ARMs) whose rates are adjusted annually.”
The type of interest rates are usually decided on which payout and loan terms best suit your unique needs and goals. For example:
Monthly payout options, like term or tenure payments are based on adjustable interest rates. The line of credit is also based on the adjustable interest rates.
However, the lump sum is based on a fixed interest rates.
Age Limits and General Terms of Reverse Mortgages
Traditional Reverse Mortgage - Follows GNMA and FHA guidelines
Minimum Age 62 - IF you have a Co-borrower or Eligible Non-Borrowing Spouse (NBS) then guidelines are based on the youngest. Translation: You AND your co-borrower have to be at least 62 at the time of application.
The amount you can borrow - Loan to value - is based on the youngest age. The older the youngest borrower is the higher the Loan to value can be.
Reverse Mortgage can only be on your Primary Residence
Non-recourse loan: never repay more than home value.
If utilizing the Line of Credit growth feature - can never be frozen or forced due as long as borrower follows the Loan Terms.
No required monthly mortgage payment due to the lender; however, the borrower is still responsible for Property Taxes and Homeowner Insurance.
Max Lending Limit varies every year and is set by the U.S. Department of Housing and Urban Development (HUD) The lending limit is also referred to as maximum claim amount, maximum principle limit, or reverse mortgage lending limit. Any amount over that limit is considered a Jumbo Reverse mortgage and companies have slightly different terms.
Your right to cancel a reverse mortgage: In the majority of cases involving reverse mortgages, you will have three business days following the closing of the loan to cancel the arrangement without incurring any fees or other consequences. This is referred to as "rescission," which is your legal right.
In order to cancel, you are required to give the lender written notice. Send your letter by certified mail and ask for a return receipt so that you have record of the date you sent the notice of cancellation and the date the lender received it. Always be sure to keep a copy of any correspondence that you have with your lender. If you decide to cancel the reverse mortgage loan, the lender has twenty days to repay any money you've already contributed toward the financing of the loan.
If you believe that there is a reason to cancel the loan beyond the initial three-day period, you should seek the assistance of a lawyer in order to determine whether or not you have the right to cancel the loan.
Note: This information only applies to Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage loan.
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