A reverse mortgage is an option for senior citizens if they need a little extra money each month. A reverse mortgage allows people to use the equity they have built up in their home for daily expenses, vacations or whatever else they desire while still living in their home. In effect, the role of the lender and the homeowner have reversed: The bank pays the homeowner to live in the house. Upon the homeowner's death or move to another living arrangement, the house is sold to pay off the bank.
Age Requirements
Reverse mortgages are available to those who are at least 62 years old at the time of application. If the home to be refinanced is jointly owned, the youngest member of the household must be 62 or older. Philip Moeller's February 2009 report on the topic of reverse mortgages in "U.S. News and World Report" explains that typically, receiving a higher percentage of the home's worth goes hand in hand with age. Older reverse mortgage applicants are less likely to live in their homes as long as someone who has just turned 62, so they can generally expect a larger payout.
Home Ownership Status
Homeowners must make their primary residence the object of a reverse mortgage if they own more than one property, according to Senior Magazine Online. Vacation property and timeshares do not qualify for a reverse mortgage. Senior citizens who are considering a reverse mortgage should have already paid off their home or have just a few years left to benefit from the plan. Paying off the original mortgage is one of the terms of taking out a reverse mortgage; homeowners who do not have a high level of equity in their home will not benefit from the concept of a reverse mortgage as much as someone who does not currently make a monthly payment. Mary Beth Franklin, senior editor for "Kiplingers" explains that in 2009, home ownership rules were expanded to allow seniors to use a reverse mortgage to buy a new home instead of using it on an existing home.
Loan Caps
Borrowers can request up to $417,000 in their reverse mortgage application depending on their home's appraised value, according to Mary Beth Franklin. This loan cap was raised in November 2008; the previous rule permitted loan amounts to vary depending on the location of the home. Fees for the closing on a reverse mortgage are also capped; loan origination fees can be no more than $6,000.
Payment Terms
Homeowners with a reverse mortgage are responsible for paying property taxes and homeowner's insurance as they always have. Home maintenance, in whatever form required, is also the responsibility of the homeowner. The repayment rules of the reverse mortgage are simple: No payment is required until the remaining homeowner either leaves the home or passes away. Reverse mortgage payouts are issued monthly, but seniors should be cautious about accepting a windfall, according to the American Association for Retired Persons (AARP). Accepting only as much money as is required to stay afloat may safeguard against financial problems in the future. In some cases, the home may drop in value, making the loan repayment cost more than the house is worth and thus a burden to heirs.
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