How Does A Reverse Mortgage Work?

In essence a reverse mortgage, or a home equity conversion mortgage (HECM), is a loan that allows seniors who are above the age of 62 to borrow against their home's equity.  In a reverse mortgage, the borrower does not have to repay their loans until they sell the house or move out permanently (whether by declining health or death).  If the borrower were to die, their heirs would be responsible for the loan.  A reverse mortgage is generally paid off by selling or refinancing the home.  It is a very unique loan intended for very specific circumstances.

Many seniors end up in a house rich but a cash poor situation.  What this means is at their home has a lot of equity which can be exchanged for money when they desperately need it.  That is what the reverse mortgage was initially designed for - seniors in need of some quick cash.

There are many reasons that the elderly may need this emergency cash: large medical bills, nursing home costs, home improvements, or anything else that one might need extra cash for. In these situations a reverse mortgage might be a good idea. But if the homeowner doesn't wish bequeath their home and they probably should think about another method.

To qualify for reverse mortgage must be at least 62 years of age and actually live in the home that you wish to borrow against. Every member of the household(spouse, etc.) needs to apply for the reverse mortgage loan as well. Also he mortgage these be paid off or be almost paid off entirely. You do not need a specific income to qualify, in fact most to apply for this type of loan have very little or no income.

You have several different option for getting paid. You can choose either one large lump sum or to have monthly payments. In some states you may also have a line of credit that you can use at your own discretion. There is no stipulations on how you can use the money - you can do whatever you want to with it. The total amount owed will be whatever the lender has paid to the homeowner at the end of the loan. But you still need to be aware that you are responsible for all property taxes and insurance payments due. If you do not pay these things you will may be considered in default of loan which will result in the total reverse mortgage loan becoming due.

Other Applications Of Reverse Mortgages

A reverse mortgage, or senior reverse mortgage, can also be used for the purchase of a new home. This is not a nationwide program but is available in many states. It allows seniors over the age of 62 to buy a brand-new home with reverse mortgage proceeds. But like with all the other options available you will have to pay the loan back.

When the worst things that can happen when you have a reverse mortgage loan is that you have to move out of your home unexpectedly.  What happens with that situation occurs is that you have to pay back the entire loan in full.  And you only have a year to do so.  The good news is that you'll never owe more than the total value of the home but it also leaves you with no money from the sale of your home.

You also need to be aware that a reverse mortgage can be expensive especially when it comes to closing time.  You may only see 30 to 80% of the total value of your home after a reverse mortgage.  Also there are service fees that can be in the range of 30 or more dollars a month.  There are also some loans that carry fixed or adjustable interest rates.  Also if you can hold off on getting a reverse mortgage may be able to get a lot more at say age 80 and then at 65.

You need to understand that a reverse mortgage is not a magical program that gives you unlimited money for nothing.  You do not get free money - you have to pay it back eventually or the bank can take possession of the house.  The reverse mortgage is great only for those who are aware of the risks and find themselves with a home win a lot of equity.  It can be a great way to pay for the things that you need every month but do not have the income for.  As with any contractual arrangement need to fully understand the terms of your reverse mortgage loan before you ever decide to go through an application.