How Reverse Mortgages Work
What is a reverse mortgage?
A reverse mortgage is a loan using your home as collateral that you don’t have to repay as long as you live in the home. Unlike a traditional mortgage loan, where you make monthly payments in order to pay down principal and build up equity (the portion of your home you “own”), a reverse mortgage works the opposite. You get money each month, and the amount owed on the home increases as your equity decreases. You do always retain the title to your home.
Who’s a reverse mortgage for?
Let’s say you are a homeowner, 62 years or older, and on a fixed or limited income. You may feel house-rich and cash poor. Your home may represent a significant value that you want to tap into for living expenses.
Traditional methods of accessing that equity include a home equity loan or line of credit, or a cash-out refinance. But those loans require repayment in the form of a monthly payment. Another traditional option is to sell your home and live off the proceeds.
A reverse mortgage, however, allows you to stay in your home, while still taking advantage of the equity you’ve built.
How does a reverse mortgage work?
The lender assesses the value of your home, your age (to be eligible for a HUD reverse mortgage you must be at least 62) and current interest rates to qualify you for a reverse mortgage. Typically, the older you are and the more equity you have in your home, the more you will qualify for. In fact, to qualify you must own your home outright or have a low mortgage balance.
You can take the funds from a reverse mortgage as either a monthly payment or as a line of credit where you can access the cash when you need it, or as a combination of these. The reverse mortgage loan does not need to be repaid until you permanently vacate your home. And, what you owe will never exceed the value of your home. When you do vacate the home, you or your estate repays the proceeds from the reverse mortgage as well as interest and fees. Any remaining equity in your home would go to your or your heirs.
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