A reverse mortgage is a home loan designed for seniors who already own a home and would like to use some of the home’s equity to supplement their retirement income. This mortgage is called “reverse” because the payments are reversed – instead of the borrower making payments to the lender, the lender makes payments to the borrower. The loan is paid back when either the borrower sells the home, permanently moves out of it or passes away. The loan amount is based on the age of the borrower and the value of the home.
Adjustable Rate Mortgage (ARM):
Adjustable loans offer very low initial interest rates and payment rates. ARM Loans are available in terms of 30 or 40 years. Interest rates are calculated by adding the index value to a fixed margin. This is done on a monthly, semi-annual or annual basis, depending on the type of ARM. The index could be one of many. The most common is the LIBOR (London Inter-bank offered Rate).
Fixed Rate Loans:
These loans are the most common and are available in terms of 10, 15, 20, 30 years. The interest rate remains the same throughout the loan term.
Home Equity Line of Credit (HELOC):
Typically used as a second trust deed, loan amounts are from $25,000 – $1,000,000. Loan terms vary from 5, 10, 15, & 30 years with a minimum payment of interest only during the draw period. With a HELOC, your payment is based on the amount of money you actually draw from your account. For example, if you have a Line of Credit in the amount of $100,000 and you use $25,000, your payment is based on $25,000. The balance of $75,000 is your remaining unused portion and is available when you need it during the draw period of you loan. Draw periods are usually from 5 to 10 years in length. After this draw period has expired, the loan payment becomes a principle and interest payment for the remaining term of the loan.
The Borrower is issued a credit card or given a checkbook or both, to access their Line of Credit. The interest rate is calculated by adding the index (usually the Wall Street Journal Prime Rate) to a fixed Margin.
HELOC’s are used for purchase money second trust deeds, to consolidate debt, pay for remodeling or just held as an emergency fund.
Interest Only Payments:
This option allows for a payment that only pays the interest on the loan. The principle balance remains the same. Interest only payments are typically available Hybrid or Intermediate ARMS and HELOC’s.
Intermediate or Hybrid ARM’s:
The initial interest rate is fixed for a period of time ranging from 3, 5, 7, or 10 years. After this fixed period expires, the loan converts to an adjustable rate mortgage. After the initial adjustment, the rate would adjust on a semi annual or annual basis. The borrower is protected with rate cap maximums.