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How Does Reverse Mortgage Work And Why Is It Beneficial For You

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A reverse mortgage is a loan option that allows seniors 62 years or older to live comfortably in their retirement. Borrowers can cash off their equity and pay for their mortgages or other expenses this way. This type of mortgage is most popular with seniors who’ve run out of sources of income and savings. 

In this article, we look at what exactly reverse mortgages are, how they work, and how they can benefit borrowers. Read on to find out more:

What Is A Reverse Mortgage?  

A reverse mortgage is an inverse mortgage where roles are switched. In traditional mortgage plans, a person takes out a loan to purchase a home, then repays the loan over time.  

With reverse mortgages, a borrower with significant home equity takes a loan against the value of the home. The borrower already owns a home. They then receive the amount borrowed in a single deposit, fixed monthly instalments or by a line of credit. 

Additionally, the borrower in an inverse mortgage isn’t necessarily required to repay the lender. Instead, once the borrower has moved to another property or dies, their heirs are responsible for paying off the loan. In case the profits from the sale exceed the loan amount, the borrower or their estate gets the difference. 

The loan amount isn’t supposed to exceed the home’s value. If this happens, the borrower and their heirs won’t be responsible for the difference. Some events that may lead to such a situation are if the market value of the home drops or the borrower lives for a long time. 

Most reverse mortgage lenders are government-regulated. This means that they follow strict guidelines and lending measures. Some private lenders who operate away from banks, but these have the risk of being conned. 

Who Qualifies For A Reverse Mortgage? 

The primary qualification to be eligible for a reverse mortgage is being 62 years or older. However, you can also qualify if your partner is 62 years or older, and you meet other qualifications, which include: 

If the lender is government-regulated, you’ll be required to attend a consumer information session with a HUD-approved reverse mortgage counsellor. 

Private reverse mortgage lenders have their criteria that differ from lender to lender and also loan program. 

How Does It Work? 

In conventional mortgages, a financial institution — usually banks — lend the borrower money to buy a home. The borrower then pays back the money within a certain period in fixed instalments.  

Reverse mortgages are the inverse of traditional mortgages. The lender pays the borrower a fixed amount. How these payments are made solely depends on what the borrower chooses. Also, interest is only paid on the money received. 

The interest is forwarded to the loan balance. This means that the borrower doesn’t have to pay anything upfront. The borrower also stays with the house’s title. During the loan’s lifetime, the borrower’s debt grows, while home equity reduces. 

The process of taking a reverse mortgage is pretty straightforward. As mentioned before, the borrower needs to own a home outright or have at least 50% equity. Owning a home gives the homeowner liquidity by taking away equity. Once a borrower decides that this is what they want, they see a reverse mortgage counsellor. This counsellor helps them find the most suitable lender and package for them. 

The next step after finding the best lender is the application process, where the lender has to check the borrower’s credit score. If they’re eligible, they review the borrower’s property, its title, and estimated value.  

Once approved, the lender funds the loan depending on the plan chosen by the borrower. It could be in a lump sum, line of credit, or structured instalments (monthly, quarterly, or yearly). You can choose to receive the money in one of the following ways: 

When the borrower receives the money, they can use it for the purpose provided in the loan agreement. Some reverse mortgages have restrictions on how you can use the money. For example, you can only use the proceeds for house renovations in some reverse mortgages, while other services don’t have any form of restriction. 

Reverse mortgages last until the borrower dies or moves houses. The borrower or their heirs then pay the loan. Alternatively, the property can be sold for the lender to recoup the money. In case there’s excess money after the house has been sold, the borrower benefits from the difference. 

Types Of Reverse Mortgages

There are three major types of reverse mortgages. Each of them depends on the borrower’s needs. They are: 

  1. Single-Purpose Reverse Mortgage: Government agencies offer this type of reverse mortgage at federal and state levels. Non-profit organizations also offer it. This type of reverse mortgage has rules and restrictions on how you can use the proceeds. In most cases, single-purpose reverse mortgages can only be used for home repairs or pay for property tax. They’re most suitable if you need to make urgent home repairs or you’re late on home insurance and property taxes. Basically, the lender has to approve of how the money will be spent. 
  2. Home Equity Conversion Mortgage (HECM): This is the most popular type of reverse mortgage and can be more costly than traditional mortgages. If you qualify for a HECM loan, you can use the money for any purpose. For example, you can use the loan to buy another home. Whichever way you choose to spend the money, be careful and mind the consequences. You also have to pay heavy insurance fees that protect the lender, not you, in case of losses. 
  3. Proprietary Reverse Mortgage: These are private loans that are usually not federally regulated like the HECM. Because they aren’t government-regulated, they can use crafty terms, such as higher loan amounts, to attract borrowers. However, they can have much higher interest rates than federally regulated loans. Because they’re the easiest to access and fund, you should be careful with them as they sometimes attract fraudulent lenders. 

What Are the Benefits Of Reverse Mortgage? 

Reverse mortgages have their advantages. Some are listed below:

Key Takeaways 

Reverse mortgages allow seniors 62 years or older with significant home equity to cash off from their homes’ value and spend the funds to pay mortgages or other living expenses. Before applying for a reverse mortgage, speak to an expert to know if you’re eligible. They’ll also be able to inform you of things you’ll need to know. Reverse mortgages last until the borrower dies or moves. In such cases, the borrower or their heirs will still have to pay off the loan.

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