In US, traditionally mostly reverse mortgages are government backed loans, but now around a dozen other players have also entered into the market. Reverse mortgage was introduced in the US in the late 1980s. Since then, the number of people pledging their property for reverse mortgage has been on the rise. Take a look at the numbers.
In 1990, there were just 157 people who had opted for this product. In 2006, 59,781 people opted for reverse mortgage. The concept in India is similar to the one in the US. To be eligible for reverse mortgage, you must be at least 62 years old and own a property. "In a reverse mortgage, you borrow money using your home as collateral but there aren't any payments. The interest that is charged is added to the balance owed. That means you owe more each month. When you die or when the house is sold, the debt gets paid off," says Jeffrey D. Voudrie, CFP, CEPP, president, Legacy Planning Group Inc.
Once you pledge your property for reverse mortgage, you will receive funds as long as you live in that property. There are three main sources that home owners can tap in the US. One of these is the federally insured Home Equity Conversion Mortgage, administered by the Department of Housing and Urban Development. The majority of people opting for reverse mortgage go for HECM as it offers the best interest rates and loan amount. However, if they opt for government-insured reverse mortgages, then they will also have to pay a fee for Federal Housing Administration insurance that will protect against the value of the home going below the loan amount.
There are also single-purpose reverse mortgages, offered by state or local government agencies for a specific reason and, lastly, proprietary reverse mortgages offered by banks, mortgage companies and other private lenders. People planning a property reverse mortgage have to undergo free mortgage counseling from an independent government-approved "housing agency". Reverse mortgages offered by other financial institutions also require individuals to undergo similar counseling.
"Seniors like this product because it allows them to stay in their homes and they are not required to make monthly payments," says Voudrie. However, a concern among most elders is the rising interest rates, which increases the cost of the loan. Today, in US about 90% of reverse mortgages are the traditional government-backed product, the most prevalent of which is the Federal Housing Administration's home equity conversion mortgage.
Borrowers have taken out about 71,500 new FHA-based reverse mortgages in the first 8 months of this fiscal year 2007-08 so far, a 49% jump from about 48,000 loans in the same period a year earlier. From 1990 through to the present, about 310,000 such loans have been taken out .US property stock is estimated at around $12 trillion, out of which at present reverse mortgage accounts for only 1%, but its pace of growth in recent year is about 5 times the traditional mortgage.
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. There are no minimum income or credit requirements, but there are other requirements and homeowners must make sure that they qualify for the loan before they invest significant time or money into the process. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. A pending bankruptcy which has not been finalized may, however, slow the process. Some types of dwellings do not qualify, while others (like mobile homes) have special requirements (such as being on an approved permanent foundation and built after 1976) in order to be approved. Before borrowing, applicants must seek third party financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is a safeguard for the borrower and his/her family, to make sure the borrower completely understands what a reverse mortgage is and how one is obtained.
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