How Does a Reverse Mortgage Work?

How Does a Reverse Mortgage Work

Thinking about a reverse mortgage?

You have probably seen the commercials for them on TV and heard them on the radio, but how many of you actually know how a reverse mortgage works?

In a nutshell, a reverse mortgage is the polar opposite of a conventional mortgage.

In a reverse mortgage, the borrower receives a monthly payment from the mortgage lender instead of making a monthly mortgage payment to the lender.  But, even though you are receiving a check from the lender rather than sending one, a reverse mortgage is still a loan.

Now, before you decide that getting a monthly check in the mail is much better than sending one out, you should know that not everyone qualifies for a reverse mortgage. Here are a few of the things you need to know before applying for a reverse mortgage:

  • You have to be age 62 or older
  • You have to live in the house that you are using to secure the reverse mortgage
  • Everyone listed on the deed to the home must be on the application
  • Each applicant must meet all of the eligibility requirements before the loan can commence
  • The home must be paid in full or have a balance low enough that the proceeds from the reverse mortgage can pay it off

Lenders will look at a variety of things when you apply for a reverse mortgage, however the most important criteria is the value of your home. This is the factor that determines the total value of your loan. Obviously, the more valuable your home is (and the less you owe on it) the more you can expect to get from the lender.

After you get approved for the loan you will have a few options on how you would like your funds to be dispersed. You can receive the proceeds of your loan:

  • As a lump sum
  • As monthly payments
  • As a line of credit that can be used as you wish
  • Any combination of these

The nice thing about reverse mortgages is their flexibility. You can use the money for whatever you wish and not worry about ever making a payment to the lender as long as you live, at least as long as you continue to live in the home.

If you choose to move after receiving a reverse mortgage, the loan is due in full immediately. And, of course, the loan comes due at the time that the last applicant passes away.

If your estate does not have the cash available to pay off the loan and your heirs determine that they would rather not pay the note themselves, the lender will foreclose on the property and sell it at auction.  There are two very important reverse mortgage disadvantages that you need to know before applying:

You will still be responsible for paying the taxes and insurance on your home. If you fail to make the regularly scheduled payments on either of these, you can be considered in default of the loan agreement, making it due in full immediately.

You will need to be prepared to pay the closing costs associated with the loan. Reverse mortgages have closing costs just like conventional mortgages and will require the payment of closing costs before the proceeds can be dispersed.

A reverse mortgage is not a magic bullet. It is a financial vehicle that seniors who are asset rich/cash poor can use to ensure that they have the money they need to live out their golden years with peace of mind by using the equity in their homes.

It is important to read and understand all of the terms and conditions of the reverse mortgage product you choose before applying.

What do you think about the reverse mortgage? Is there ever a good reason to get one?

Image by Ed Yourdon

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Last Edited: February 5, 2014 @ 9:15 am

Comments

  1. shellyleilanni13 says:

    I lived with my aunt and I took care of her when she died Jan 2013 I didnt know what to do , I am still here with my 16 month old daughter and need some help on what if any legal rights or how long do I have to stay. Thank you Rochelle you can email me at shellymario2011@gmail.Com