How does a reverse mortgage work?
If you are a homeowner at least 62 years of age or older and have sufficient equity in your principal residence, you are eligible to participate in FHA's reverse mortgage program. The program allows you to borrow against your home’s equity. You can choose to receive your loan proceeds in these different ways
- Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term - equal monthly payments for a fixed period of months selected.
- Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure - combination of line of credit plus scheduled monthly payments for as long as you remain in the home.
- Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
You can change your payment options at any time for a fee of $20.
Unlike traditional home equity loans, a reverse mortgage does not require repayment as long as the home is your principal residence, property taxes & insurance are paid and the home is well maintained. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to you or your heirs.
If the sales proceeds are insufficient to pay the amount owed, FHA will pay the lender the amount of the shortfall. FHA collects an insurance premium (called MIP or Mortgage Insurance Premium) from all borrowers to provide this coverage.
In a nutshell - instead of paying monthly house payments out of your pocket, you let your home pay you. A reverse is not for everyone, but if you are looking to improve your monthly cash flow and are planning to remain in your home it may be a suitable financial tool.
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