What is Reverse Mortgage and How Does it Work?

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What a Reverse Mortgage is.

A reverse mortgage is an equity loan that reserves older homeowners and does not require a monthly mortgage payment. Instead of the monthly payments, the loan is repaid after the borrower moves out or passes. This option is seen as a last-resort source of income because it has a great retirement planning tool for homeowners.

 

Who Would Benefit from a Reverse Mortgage?

For more instances than one, most say that a reverse mortgage would help people who:

  • Don’t plan to move.
  • Can afford the cost of maintaining their home.
  • Want to access the equity in their home to supplement their income or have money available for a rainy day.

Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, or NRMLA says that, “There are a lot of motivations leading into it,” Bell says. “In some cases, people may have an immediate need to pay off debt, or they may have had some unexpected expenses like a home repair or health care situation.”

The way it also works is that the bank will make payments to the borrower throughout a person’s lifetime based on a percentage of accumulated home equity. The loan balance does not have to be repaid until the borrower passes, sells the home or even permanently moves out.

 

The Basics of Reverse Mortgage

  • How does it work? The bank makes payments to the borrower based on a percentage of accumulated home equity.
  • When does it need to be repaid? When the borrower passes, sells the home or physically moves out.
  • Who is eligible? Seniors age 62 and older who own homes outright or have small mortgages.
  • How can the money be used? For any reason.

On the contrary though, can never owe more than the value of your home in a reverse mortgage loan, regardless of how much you borrow or have borrowed. And if the balance is less than the value of your home at the time of repayment, you or your heirs keep the difference that you get.

 

How much can you get?

There are factors that determine the amount of funds you are eligible to receive through a reverse mortgage. Here are some factors below that depend on the reverse mortgage loan amount:

 

Factors that Influence the Amount

To be eligible for a reverse mortgage, you must either own your home outright or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan that still exist. You must also use the home as your primary residence in order for this to happen.

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