When considering a reverse mortgage, understanding the terminology is crucial. These financial products can offer significant benefits to seniors, but they also come with specific terms and conditions that need to be understood clearly. Below are key reverse mortgage terms you should know before applying in the US.
1. Reverse Mortgage
A reverse mortgage is a loan available to seniors aged 62 and older that allows them to convert part of their home equity into cash. Unlike traditional mortgages, payments are not made to the lender; instead, the lender pays the homeowner based on the equity in the home.
2. Home Equity Conversion Mortgage (HECM)
The HECM is a specific type of reverse mortgage that is federally insured and is the most common option. It provides homeowners the opportunity to take out a loan against their home equity while retaining ownership of their property.
3. Loan-To-Value Ratio (LTV)
The Loan-To-Value ratio is a critical measurement that compares the amount of the loan to the appraised value of the home. This ratio determines how much money a homeowner can borrow through a reverse mortgage.
4. Maturity Event
A maturity event occurs when the reverse mortgage loan must be repaid. This typically happens when the homeowner sells the home, moves out permanently, or passes away.
5. Obligations
Borrowers have certain obligations while holding a reverse mortgage. These include maintaining the home, paying property taxes, homeowners insurance, and any applicable homeowners association fees. Failure to meet these obligations could result in foreclosure.
6. Closing Costs
Closing costs in a reverse mortgage can include origination fees, appraisal fees, title insurance, and more. It’s important for applicants to understand these costs upfront, as they can be rolled into the loan amount.
7. Impound Account
Some lenders may require an impound account to cover property taxes and homeowner's insurance. This means that a portion of the reverse mortgage loan will be set aside to ensure these costs are paid on time.
8. Non-Recourse Loan
A non-recourse loan ensures that the borrower will never owe more than the value of the home at the time the loan is repaid, protecting borrowers from debt that exceeds their home’s worth.
9. Counseling Requirement
Before obtaining a reverse mortgage, applicants are required to undergo counseling with a HUD-approved counselor. This ensures that the homeowner fully understands the implications and obligations of the loan.
10. Equity Share
An equity share agreement allows lenders to share in the appreciation of the property’s value. This could affect the amount the homeowner receives and the overall outcome of the reverse mortgage loan.
Understanding these reverse mortgage terms can empower homeowners to make informed decisions about their financial future. Before applying, it's advisable to consult with financial advisors or mortgage specialists to explore all available options and ensure that a reverse mortgage is the right fit for your situation.
