How A Reverse Mortgage Works

A reverse mortgage is a loan product that allows homeowners 62 years of age and older to use their equity to generate tax-free income, without having to take or sell the home on a new mortgage payment. The reverse mortgage is exactly what the title states, the reverse of a standard mortgage. With a standard mortgage, the borrower (or homeowner) makes monthly payments to the lender (or bank or mortgage company), in order to pay back the loan that the lender originally lent to for the purchase or refinance of the house.

Ever wonder how a reverse mortgage works? For older Americans, there is another, less common option that is growing in popularity as home prices have increased and baby boomers have moved closer to retirement age: the reverse mortgage. Do you know what it is, and do you know how a reverse mortgage works?

The reverse mortgage is exactly what the title states, the reverse of a standard mortgage. For reverse mortgage borrowers with an existing mortgage, that mortgage will need to be paid off completely, so that the new reverse mortgage will be the only lien on the house. If the proceeds from the reverse mortgage are not ample to pay off the existing mortgage, the borrower will need to access savings or other sources to pay off the rest of existing mortgage amount. The more common scenario is one in which there is a small or no mortgage on the home and then the borrower is able to access nearly the full amount of the reverse mortgage to use at their discretion. One very important facet of the reverse mortgage process is the consumer counseling that is required for borrowers contemplating a reverse mortgage.

There are a few factors that determine how much money a borrower will receive from a reverse mortgage, such as the value of the home, borrower’s (and co-borrower’s) age, current interest rates and any lending limits that may be standard for your geographic area. The line of credit is the most popular option, with nearly 60% of reverse mortgage borrowers choosing to the option to draw income or a lump sum off the line at the time of their choosing. And the proceeds from the reverse mortgage can be used for anything, completely at the discretion of the borrower, though most borrowers use the funds for home repairs or modifications, health care expenses, to settle other debts, or for their long-planned vacation!

Overall, for older Americans contemplating a stress-free retirement, the reverse mortgage may be just the option! Just make sure that you know your goals and options … and how a reverse mortgage works.

One very important facet of the reverse mortgage process is the consumer counseling that is required for borrowers contemplating a reverse mortgage. Counselors are obligated by law to review with you all of the implications of the new mortgage, and what your potential options are.

For reverse mortgage borrowers with an existing mortgage, that mortgage will need to be paid off completely, so that the new reverse mortgage will be the only lien on the house. If the proceeds from the reverse mortgage are not ample to pay off the existing mortgage, the borrower will need to access savings or other sources to pay off the rest of existing mortgage amount. The more common scenario is one in which there is a small or no mortgage on the home and then the borrower is able to access nearly the full amount of the reverse mortgage to use at their discretion.

Leave a Reply

Your email address will not be published. Required fields are marked *