Reverse Mortgage, How it Works?
Mortgages are loan programs strictly for seniors age 62 or older.
This program allows elderly homeowners to use their house as collateral in order to access or cash out a portion
of the equity. This is not the same as a cash-out mortgage
refinance. With a reverse mortgage, the homeowner isn’t required to
pay back the loan unless certain terms aren’t met. There are benefits to this kind of mortgage, but it may not
be right for everyone. Borrowers should know how a reverse mortgage works and what parameters need to be met in
order to qualify.
Reverse mortgages require a
house to be clear or nearly paid off. This isn’t mortgage
refinancing, so if there is an existing mortgage, a reverse mortgage is still a possibility, as long as it
retains first position. The house is the collateral and the equity can be spent as the homeowner sees
fit. How much equity can be taken out is dependent on the appraised
market value and the homeowner’s age. The older a homeowner is, the
more equity they can receive. There are different options for how
the cash is distributed. The most common are, all in one lump sum,
in monthly payouts or like a line of credit where it is taken out as needed.
The mortgage is paid off
after the homeowner dies moves or sells the home. A house with a
reverse mortgage can be left to heirs. If there is an estate,
the heirs can choose to pay off the lien and keep the house, or allow the bank to sell the house to pay the
lien. If any proceeds are left from the sale of the house, they are given to the estate. If the homeowner
decides to buy another house, then the mortgage is required to be paid off if the borrower will be using the new
residence as their primary residence.
A reverse mortgage is a
good option for homeowners who are going to outlive their assets and don’t have enough income from Social
Security, retirement/pension or other income to live. A reverse mortgage may also be beneficial for borrowers
who don’t have heirs to pass any assets to. Because it’s a loan, no taxes are paid, yet with any loan, there are
many factors to carefully consider.
A reverse mortgage is paid
back with interest. Interest rates are comparable with conventional
loan rates. There are no credit check requirements for the borrower
so if there is a bad credit mortgage on the house, the homeowner can still qualify for a reverse
mortgage. There are title fees, an upfront premium and other fees
as well, which can make closing costs high.
While a reverse mortgage is
not the right choice for all seniors, it does offer some attractive benefits. Knowing how it works and what it costs is the first step in deciding if the
benefits outweigh the costs.