Homeowners with equity in their homes often wonder how they can utilize these funds before they sell their properties. A homeowner who is 62 years of age or older may be eligible to receive a reverse mortgage, which is a loan that allows individuals to borrow against the equity that they have built up in their homes. With a typical mortgage, a homeowner is required to make monthly payments to his or her lender, and with each monthly payment, the homeowner’s equity in his or her home increases. In contrast, with a reverse mortgage, homeowners are not required to make monthly principal payments on their loan balance as long as they live in the home, and the lender pays cash to the homeowner each month. Homeowners with a reverse mortgage are still required to pay real estate taxes, homeowners’ insurance premiums, and condo or home association fees. A homeowner is not required to make any payments on his or her reverse mortgage until the homeowner sells or vacates his or her home.
The Connecticut Housing and Finance Authority (CHFA) is now offering a reverse annuity mortgage (RAM) program that is designed to help older homeowners remain in their homes. After qualifying for this program, a homeowner receives a direct deposit from CHFA, which includes the principal and interest payments of the RAM loan, and the homeowner can then use this money to pay for housing or long-term care expenses. CHFA’s reverse annuity mortgage also includes low closing costs and interest rates.
Reverse mortgages are attractive for many reasons. First, the funds that homeowners receive are not restricted and can be used for any purpose. In addition, reverse mortgages enable homeowners to derive income from their homes while they still own and live in their homes. Second, a borrower cannot lose his or her home after a missed payment because payments are not due on the loan until the borrower permanently leaves his or her home. Finally, when it is time for a homeowner to repay the loan, the homeowner will never owe more than what the home is worth at that point in time. Thus, reverse mortgages are particularly advantageous if a home has decreased in value since the homeowner obtained a reverse mortgage.
However, there are also some disadvantages associated with reverse mortgages. Fundamentally, reverse mortgages are loans, which often have high origination fees and interest rates that are higher than those applied to traditional home equity loans. Although homeowners are not expected to make payments on the loans while they are living in their homes, homeowners may struggle to repay the loans when they finally vacate their residences. For example, if a homeowner dies, the home is supposed to be sold in order to generate funds to repay the loan, which means that the homeowner’s heirs cannot take title to the home unless the heirs can personally repay the outstanding balance of the reverse mortgage. Related to this point, if a homeowner must relocate to a nursing home or assisted living facility, he or she must start repaying his or her reverse mortgage at the time of relocation because the homeowner technically no longer lives in his or her home, which can be a substantial burden on the homeowner.
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