How Reverse Mortgage Works
As a homeowner of at least 62 years old, when you are cash-strapped and planning of using the equity in your home to meet your financial obligations, you may consider a reverse mortgage as a last resort source of raising fund. You may wish to know how a reverse mortgage works.
In simple terms, a reverse mortgage works in the opposite manner of the traditional mortgage. Rather than making payments to lessen the loan balance and grow the equity in your home, you are receiving proceeds from the reverse mortgage that will reduce the equity in your home and increase your debt balance.
It may seem a bad thing to increase your debt; however, it is a rational means of raising additional money to spend without worrying about repayment. Even when the loan becomes due, the burden of the repayment does not fall on your shoulders, the home serving as collateral will be converted to repay the mortgage loan.
The Basics of a Reverse Mortgage
How does a reverse mortgage work for seniors?
The lender makes payments to the borrower conditional on a percentage of the equity in your home in contrary to the traditional mortgages that borrowers must make deposits.
When does a reverse mortgage have to be paid back?
When the borrower passes away, moves out of the home permanently, or sells the home.
Who is qualified?
Seniors who are homeowners and are at least 62 years of age with small mortgages.
- How can the proceeds from the reverse mortgage be used?
The proceeds can be used for any purpose such as extra income, pay health care bills, pay off debts, or finance home renovation and repairs. However, if the homeowner has an existing mortgage, the mortgage must first be paid before using the remaining fund as the borrower pleases.
How much can you get?
Several factors limit the amount of funds you can receive from a reverse mortgage.
Factors that Determine the Loan Amount
- Age (If you are applying as couples, the age of the youngest spouse is the determinant)
- The assessed value of the home
- Current interest rate
- The lower amount of the assessed value of the home and FHA mortgage limit of $625,500
How You Can Receive the Reverse Mortgage Payments
How you can receive the proceeds from a reverse mortgage loan depends on the type of loan.
Fixed Interest Rate Reverse Mortgage
The only option available to receive payments if the borrower chooses the fixed interest rate type of reverse mortgage is the Single Lump Sum payment.
- Lump sum
- Fixed monthly payments
- A line of credit
- A combination of the three options above
However, it must be stated that you are required to make the home your primary residence, pay mandatory property taxes and insurance, and maintain and renovate the home during the term of the loan. Failure to abide by these regulations makes the loan due and payable; in fact, it could result in foreclosure in certain cases.