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What Is A Reverse Mortgage And How Does It Work?

If you are retired and you are not sure you have enough money, a solution may be a reverse mortgage. Your house has a lot of value. Homeowners over the age of 60 typically have a large amount of capital stored up in their home. The numbers have been rising year on year, which is great for you if you do need to find a sum of money for whatever reason.

Home equity is only usable wealth if you sell, reduce, or borrow with that equity. And that’s when the reverse mortgage comes into play, especially for retirees with limited incomes. This will enable you to harness that wealth, especially if you don’t plan on moving.

What is a reverse mortgage?

In a word, a reverse mortgage is a loan. A homeowner, who is age 65 or older and has substantial home equity (current home market value, minus the balance of debt with the financial institution) can borrow against the equity of their home and receive funds as Lump sum, fixed monthly payment, or line of credit.

Unlike a term mortgage – the one used to buy property – a reverse mortgage does not require the homeowner to make any loan payments.

Instead, the entire loan balance is due and paid off when the borrower dies, moves permanently, or sells the home. Federal regulations require lenders to structure the transaction so that the loan amount does not exceed the value of the home and the borrower’s equity will not be responsible for paying the difference if the loan balance is greater than the value of the home.

Reverse mortgages can provide much-needed cash for seniors whose net worth is primarily related to the value of their home.

How does a reverse mortgage work?

With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The owner has the opportunity to choose how to receive these payments, and only pay the interest on the income received. The interest is transferred to the loan balance so that the homeowner does not pay anything up front. The home owner also retains the title to the home.

As with the term mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or passes away, the proceeds from the sale of the home go to the lender to pay the reverse mortgage principal, interest, mortgage insurance, and fees.

Any sale that occurs beyond what was borrowed goes to the owner or the owner’s estate. In some cases, the heirs may choose to pay the mortgage and keep the home.

Remember that those who are in charge of providing mortgages in general are financial institutions, such as banks or municipal savings banks. These institutions will guide you to get the mortgage you need.

Types of reverse mortgages

There are 2 types of reverse mortgages. The most common is the Home Equity Conversion Mortgage or HECM. The HECM represents almost all of the reverse mortgages offered by lenders on home securities and is the type that you are likely to obtain. However, if the value of your home is higher, you can ask for more information on a jumbo reverse mortgage.

When you obtain a reverse mortgage, you can choose to receive the income in 6 ways:

Lump sum.

Get all the income at once when your loan closes. This is the only option that comes with a fixed interest rate. The following have adjustable interest rates.

Monthly payments (annuity)

As long as at least one person lives in the home as their primary residence, the lender will make constant payments to the borrower.

Term payments

The lender gives the borrower equal monthly payments for a specified period of the borrower’s choice, such as 10 years.

Credit line

The money is available for the owner to borrow as needed. The homeowner only pays interest on the amounts taken from the credit line.

Monthly payments plus a line of credit

The lender provides constant monthly payments until at least one borrower occupies the home as their primary residence. If the borrower needs more than one point, they can access a line of credit.

Term payments plus a line of credit

The lender gives the borrower monthly payments for a specified period of the borrower’s choice, such as 10 years. If the borrower needs more money during or after that period, he can access the line of credit.

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