Without a doubt the two most common questions that I hear in relation to reverse mortgages are “What is a reverse mortgage?” and “How does a reverse mortgage work?”
A reverse mortgage, like a traditional mortgage, is a loan that’s made by the lender to the homeowner using the home as security or collateral. With a traditional mortgage, the homeowner utilizes their annual income to pay down their debt over time. In contrast, with a reverse mortgage, the loan balance increases over time because the homeowner is not filing monthly mortgage payments.
Oftentimes, a reverse mortgage loan doesn’t require payment until the final homeowner has passed away or has moved out of property. However, life expectancy is a major part of costs in regards to the amount of money the borrower will receive. Typically, the older you are, the more equity you’ll have in your home and the reverse mortgage balance.
How does a reverse mortgage work?
The bank or lender oftentimes makes payments to the borrower based on the percentage of home equity.
When does a reverse mortgage need to be repaid?
When the borrower passes away, sells the home, or moves out, the reverse mortgage needs to be paid.
Who’s eligible for a reverse mortgage?
Seniors aged 62 or older who already own a home outright, or have small mortgages, are eligible for a reverse mortgage.
How can the money be used?
The money can be used for any reason! Seniors that are retired typically use the cash to supplement income, pay for healthcare expenses, pay off debt, or finance home improvement jobs.
Below is an example of how a reverse mortgage works to give you a better understanding:
Tom, 62, and Anna, 70, are a retired couple, who would like to stay in their home. However, they need to boost their monthly income to afford living expenses. Tom and Anna would like to take a vacation, and they’ve heard about reverse mortgages, but don’t know the details. The couple decides to contact Becky Smith Home Loans to talk to a reverse mortgage specialist about their future goals and economic needs.
Tom and Anna meet with Becky Smith Home Loans, who determines that their home’s value is $500,000. They currently owe $40,000 on their mortgage. They then determine how the couple will spend their loan proceeds.