How a Reverse Mortgage Works

You get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you. Curious? Read more.
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People of ages 62 and above have an option to go for a reverse mortgage and use their home equity to get a lump sum amount or fixed monthly payments. Here’s all about a reverse mortgage, how much you can borrow, the ways you can collect your reverse mortgage money, and the cons of a reverse mortgage. ~ Ed.

How a Reverse Mortgage Works

Wondering how a reverse mortgage works?

When sixty-two arrives, so could your first monthly check for the rest of your life. A reverse mortgage can be a saving grace for many homeowners. It is something you should know about when buying a house.

Reverse mortgage loans allow homeowners to convert their home equity into cash income. Instead of making mortgage payments to the lender, the lender now makes payments to the homeowner.

An outstanding proposition for many, but potentially a poor situation for others, depending on your predicament, there are three types of reverse mortgages. The most popular reverse mortgage is the Home Equity Conversion Mortgage—or HECM for short. This is the most common reverse mortgage a lender will issue.

The value of your home should be $770,000 or less to be assigned one of these HECM loans. If your home value supersedes that amount, you may qualify for a Jumbo Reverse Mortgage.

Ways to Collect Your Reverse Mortgage Money

Getting paid to just remain in your home sounds like easy money. But how do you receive it? There are many ways to collect. A lump sum is one form of collection where all the proceeds are collected at once when your loan gets finalized. This is an option that comes with a fixed interest rate.

If you prefer a monthly payment over a lump sum, then your preference would be an annuity form payment or a tenure plan. If a single borrower remains in the home, the lender will make steady monthly payments to the borrower. A borrower can prefer the terms of payment in a term payment where the borrower can set the period of the term such as 5 years. 

Reverse mortgages can be set up as similar as a credit card with a line of credit for the bank, which can be accessed on an as-needed basis. This is a great avenue for people in which their mortgage is their greatest equity and can cover basic living costs.

Cons of a Reverse Mortgage

As long as you keep up with the insurance, maintenance, and property taxes, you’ll never need an assisted living facility, at least so you hope! Now there are pitfalls to the reverse mortgage, and that comes down to the heirs of the home. Any descendants or heirs you wish to give the home to when you pass is forfeit to the bank. You think the lender would just pay you for living in your home? That home goes to the lender once you pass on.

Another pitfall is you could outlive the payments. If you use it all up, you’ll have to find another means of living if that is your only source of income or savings. You can’t borrow the full value of what your home is worth, not even close to it.

How Much Can You Borrow

Some of your home equity must be used to pay the loan expenses, mortgage premiums, and interest. Here’s what to know about how much you can borrow. Loan proceeds are based on the age of the youngest borrower. If the borrower is married, a younger spouse, even if the younger spouse is not a borrower. The older the younger borrower is, the higher the loan proceeds can be.

The lower your mortgage rate is, the more you can borrow against it. The higher your appraised value, the more money you will have access to on the reverse mortgage. A lender won’t withhold part of the mortgage to pay property taxes and homeowner’s insurance on the owner’s behalf.

Now, in a circumstance where you are underwater on your mortgage and think you are facing foreclosure in some possibility, the reverse mortgage can be your saving grace. To keep you from going underwater on your mortgage, you can now make your monthly payments and no longer must make a debt payment to your lender because the loan is now reversed.

Your responsibilities now stretch to maintaining the home, so it holds fair market value and keeping up with your insurances and maintenance costs. But that equity line from the lender can be paid to offset those costs.

Final Words

You can earn a lump sum amount or monthly payments if you opt for a reverse mortgage. After you pass, the lender will become the homeowner.

Only homeowners age 62 and older can borrow from their home’s equity. The factors that decide the amount of funds from a reverse mortgage are the home value, the age of the youngest borrower, and the current interest rates. These funds will not be equal to the worth of your home, but they are usually tax-free.

With a reverse mortgage, you make the payments suiting to your convenience without worrying about any kind of penalty.

Over to you

Have you had any experience with a reverse mortgage? Do you plan to opt for it? Share your thoughts in the comments section.

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