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Reverse Mortgage FAQs
By Hilary Gibson, Staff Writer
How Does the Interest Work on a
Reverse Mortgage?
With a reverse mortgage, you are charged
interest only on the proceeds that you receive. Most
reverse mortgages charge a variable interest rate
(although fixed rate products are entering the
marketplace) that is tied to an index, such as the 1-Yr.
Treasury Bill or the London Interbank Offered Rate
(LIBOR), plus a margin that typically adds an additional
one to three percentage points onto the rate you're
charged. Interest is not paid out of your available loan
proceeds, but instead compounds over the life of the
loan until repayment occurs.
Are There
Any Special Requirements to Get a Reverse Mortgage?
As long as you own a home, are at least
62, and have enough equity in your home, you can get a
reverse mortgage. There is no special income or medical
requirements.
What If I Have An Existing
Mortgage?
You may qualify for a reverse mortgage
even if you still owe money on an existing mortgage.
However, the reverse mortgage must be in a first lien
position, so any existing indebtedness must be paid off.
You can pay off the existing mortgage with a reverse
mortgage, money from your savings, or assistance from a
family member or friend.
For example, let's say you owe $100,000
on an existing mortgage. Based on your age, home value,
and interest rates, you qualify for $125,000 under the
reverse mortgage program. Under this scenario, you will
be able to pay off the entire existing mortgage and
still have $25,000 left over to use as you wish. If,
however, you only qualify for $85,000, then you would
need to come up with $15,000 from your own savings to
get the reverse mortgage. Even then, all the money from
the reverse mortgage will have been used to pay off the
existing mortgage. On the other hand, you won't have a
monthly mortgage payment anymore. If you find yourself
in a deficit situation where you don't have enough money
to pay off the existing mortgage, you may use funds from
a grant or gift from a family member or friend to cover
the gap, but you cannot incur a new debt obligation
(i.e., loan).
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