What is Reverse Mortgages? | how a reverse mortgage typically works.

What is Reverse Mortgages?

A reverse mortgage is a financial product typically available to homeowners age 62 and older. This allows them to convert a portion of their home equity into cash without having to sell their home or make monthly mortgage payments. Instead of the homeowner making payments to the lender, the lender makes payments to the homeowner either in a lump sum, over a line of credit, or in periodic payments.

Here's how a reverse mortgage typically works:

Eligibility: To qualify for a reverse mortgage, homeowners must meet specific criteria, including age requirements and owning the home outright or having a substantial amount of equity in the property.

Loan amount: The amount that can be borrowed through a reverse mortgage is based on factors such as the age of the homeowner, the appraised value of the home, current interest rates, and the specific program selected.

Repayment: Unlike traditional mortgages where monthly payments are made to the lender, reverse mortgages do not require monthly payments. The loan is repaid when the homeowner sells the home, moves out, or dies. At this point, the loan balance (amount borrowed plus interest and fees) must be settled. If the home is sold, the proceeds go to repay the loan, and any remaining equity belongs to the homeowner or their heirs.

Interest and fees: Interest on the outstanding loan balance accrues over time, increasing the outstanding balance. The fees associated with a reverse mortgage may include origination fees, closing costs, servicing fees and mortgage insurance premiums.

Here's an example:

Let's say a 70-year-old homeowner who has a foreclosed home worth $300,000 decides to take out a reverse mortgage. Depending on their age, borrowing limit, and prevailing interest rates, they may be eligible for a loan amount of around 50% to 60% of the appraised value of the house.

Let's say they qualify for a loan of $150,000. This money can be obtained in a variety of ways: as a lump sum, as monthly payments, or as a line of credit.

Over the years, the homeowner continues to live in the home without making any monthly mortgage payments. However, interest is charged on the outstanding loan balance.

The loan becomes due when the homeowner decides to sell the home or if they die. Let's say that at that time, the outstanding loan balance had increased to $200,000 due to accrued interest and fees. If the home is sold for $350,000, $200,000 is paid, and the remaining $150,000 goes to the homeowner or their heirs.

It is important to carefully consider the terms, costs, and implications of a reverse mortgage because it can affect the homeowner's equity in the home and heirs' inheritance. It is advisable to seek advice from financial advisors or housing counselors before opting for a reverse mortgage.