Reverse Mortgage California allows homeowners age 62 and over to borrow against their home’s equity without making monthly mortgage payments. The homeowner uses the equity in his or her home as security, and the bank provides a fixed, pre-determined rate of interest loan for a specified term. Like a home-equity line of credit (or HELOC), a reverse mortgage allows the borrower to draw down on the equity as needed without making payments.
A reverse mortgage works like a home equity credit line. Borrowers wishing to use the equity to fund their retirement can qualify. They must meet the credit criteria set by the lender. They must repay the loan based on future earning levels, not current ones, and have enough equity built up to qualify. To qualify, borrowers must also prove they will be able to continue living in the property for the loan duration.
Most reverse mortgage programs require borrowers to designate at least one heir to continue living in the house after they die. Lenders sometimes require borrowers to designate more than one heir if they have more than one beneficiary. If more than one heir is designated, the lenders will allocate funds to each borrower according to their relationship to the deceased heir. The interest rates are often a better deal for borrowers with more than one heir because they effectively finance two households rather than one.
Many reverse mortgage lenders have developed programs specifically targeted toward borrowers who belong to certain ethnic or cultural groups. An example is Urban Development Mortgage, which provides financing to borrowers and heirs of Hispanic and Asian American members of the U.S. House or Senate. Urban Development Mortgage also funds the homeowners and heirs of disabled military personnel. The lender pays interest on the loan to help defray expenses for the program but does not cover living expenses. Another reverse mortgage lender is the Association of Specialized Retirement Corporations, orASSR, which pays a dividend to its members. The interest in this type of reverse mortgage can be paid directly from the member’s annuity; however, there is no guarantee that the dividend will be paid.
A few reverse mortgage programs may be available to homeowners eligible for the FHA’s 80% affordable Housing Program, also known as the first time home buyer program. Qualification for this program is typically based on how much equity the borrower has built-up in their home. If a borrower has owned their home for a period of at least three years, they may qualify for the program. Homeowners need to qualify based on the amount of home equity they have, either through improvements on the home or the sale of an existing home. Usually, the higher the mortgage amount, the greater the amount of equity.
Because reverse mortgages are not federally funded, lenders are typically warier about providing funds to homeowners. Lenders are also leery about giving out funds unless there is some reason to believe the individual will still repay the loan. Usually, if a lender gives money to a homeowner for reverse mortgages, they will require the borrower to sign a contract stating that they are aware of all the risks, including the possibility of interest rates rising and possibly foreclosing on the house. The contract may specify that should the interest rates increase, the proceeds will go to the homeowner. In this agreement, the lender is protecting their best interests, and at the same time, allowing borrowers the opportunity to repay the loan cost-effectively.
There are several reverse mortgage options available to borrowers. The most common is a fixed-rate reverse mortgage, which pays a fixed interest rate on the reverse mortgage for the loan’s life. The borrower receives the lump sum payment. A second option is to pay a lump sum with monthly payments at different intervals, such as six or twelve monthly payments over the loan’s life. This arrangement allows borrowers to access the funds only when they need them.
Private lenders can offer reverse mortgages, but they are usually more expensive than federal programs. They may not even approve loans to borrowers with bad credit, though they often deal with people who have had trouble paying their bills in the past. To get private reverse mortgages, borrowers would have to undergo a credit check. Borrowers should also be prepared for the monthly payments to be higher than with a federal loan, as the lender will receive less interest on the loan because they are taking on more risk.