Are you already a senior citizen and need a loan through your homeownership? If the answer is yes, you’ve probably thought about taking out a mortgage on your home.
Myriads of lenders would be willing to help you with your mortgage. However, it would be best to research before you fall into fraudulent deals that can hurt you further down the line.
There is an option called a reverse mortgage, a somewhat different version of the traditional mortgage. This type of mortgage is only for senior citizens, that is, people over 62 years old. Here is a basic guide to understanding reverse mortgage accounts.
What is a reverse mortgage escrow account?
A reverse mortgage loan is very similar to a traditional mortgage because it allows a homeowner to generate a loan through their home as collateral to secure repayment. With this loan, the title to the property remains with the homeowner.
The big difference between the two types of mortgages is the manner of repayment. With a traditional mortgage, monthly payments must be made to the lender until the amount of money the property is worth and for which the loan was made is paid off.
A reverse mortgage does not involve monthly payments; the loan is paid off when the borrower or debtor no longer lives in the property. As the months go by, the debt of a traditional mortgage decreases, whereas with a reverse mortgage, interest or fees are added monthly.
This means that with a reverse mortgage, the debt does not decrease over the months; on the contrary, it increases. Normally, this debt is paid off by the homeowners or family members by selling the home.
Reverse mortgages are insured by the Federal Housing Administration (FHA) and are also commonly referred to as Home Equity Conversion Mortgages (HECM).
Among the most important characteristics of reverse mortgages are the following:
- The property must be for a borrower 62 years of age or older
- The property must be registered as the senior’s primary residence
- No monthly payments are required on the debt
- When the loan is made, the homeowner must continue to pay property taxes and insurance
- Loan funds do not have to be withdrawn all at once; funds can be withdrawn until they are depleted
The most important thing to know about the reverse mortgage is that the debt must be paid in full after the senior borrower dies or ceases to live in the property as their primary residence.
Is it necessary to have an escrow account with a reverse mortgage?
Reverse mortgage loans do not require an escrow account because the borrower does not need to make monthly payments. Classic mortgages typically include real estate taxes as well as homeowner’s insurance.
An escrow account works for these cases with traditional mortgages. However, in the case of reverse mortgages, the homeowner must pay these two things separately.
What if I have a reverse mortgage and want to sell my home?
You must pay the loan debt in full if you want to sell your property on a reverse mortgage. There are several possible scenarios that can occur when selling your property.
The first scenario is that the reverse mortgage loan amount is lesser than the amount of the home’s sale; if so, the homeowner will keep the difference from the sale and pay off their debt to the lender.
Another scenario is that the loan amount is greater than the sale of the property, in which case, the value of the sale will go directly to the lender in its entirety, and the mortgage insurance will pay the difference in the balance.
This way, the borrower will be released from the debt, even if the property was sold for less than the debt.
Mortgagors always know that the borrower is up-to-date with their home insurance and tax payments. Therefore, if you are not solvent when selling the property and the owner has already received a notice from the lender, you can sell the house at 95% of the appraised value.
The money would go towards the outstanding balance of the reverse mortgage loan, and the remaining balance would be covered by mortgage insurance.
“How the HECM Program Works | HUD.Gov / U.S. Department of Housing and Urban Development (HUD).” HUD.Gov / U.S. Department of Housing and Urban Development (HUD), https://www.hud.gov/program_offices/housing/sfh/hecm/hecmabou.