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Reverse Mortgage

Reverse Mortgages

An Older Couple's Closing a Mortgage

After years of living in a home, especially in an area where amenity complexes are continuously being developed, not to mention the renovations and upgrades which you've done to it, you will find that its current value has surpassed its original. Assuming you've acquired the home using a mortgage deal, higher value means a better loan-to-value ratio. This potentially results in canceling your mortgage insurance premiums, rates lowered, refinancing opportunities improved, and most importantly, more home equity that you could tap into.

Apart from home equity lines of credit (HELOC), home equity loans, cash-out refinances, and second mortgages, reverse mortgages (a.k.a. home equity conversion mortgages, or HECM) can be another rich resource for senior homeowners nearing retirement.

Conditions for a Reverse Mortgage

A Review of HECM

Reverse mortgages are regulated by the Department of Housing and Urban Development (HUD). Below are the conditions and requirements for eligibility:

  • You must be a senior (at least 62 years of age) who has paid off the mortgage completely or a significant portion of it - where the loan-to-value is 80% at the most.
  • The limit for a reverse mortgage is $625,500 of your home's value. Anything more than that is considered a jumbo loan in "high cost" areas.
  • Secondary homes do not qualify for a reverse mortgage.
  • Homeowners that have failed to pay off any federal debts won't be eligible.
  • Your debt-to-income ratio still needs to be in the safe zone after the fact of receiving a reverse mortgage.

One of the main advantages of an HECM is that you're never obligated to pay back more than your home is worth. Where other mortgage programs raise the rates on you if and when you're facing negative home equity, reverse mortgage plans won't.

How to Acquire an HECM

The methods of taking an HECM loan out are outlined in the table below. These methods include lump sum, tenure, term payments, and lines of credit.

Methods of Withdrawal
 Lump sum  You can choose to withdraw a large amount in one go.
 Tenure payment  If you're a big spender and want a more responsible approach, you can use a tenure payment to receive a fixed amount on a monthly basis for as long as you live in the house.
 Term payment  This is the same method of withdrawal as the tenure method only you choose a fixed period of time in which you receive your payments (i.e. 20 years).
 A line of credit  Very similar to home equity lines of credit (HELOCs), you can tap into the cash in whatever amount, and whenever you need it.

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