How Does a Reverse Mortgage Work?

happy couple dancing on a dockA reverse mortgage is a home equity loan that creates liquidity for older homeowners and does not need to be repaid until the borrower moves, sells the house, or passes away. Loan amounts are based on the home’s appraised value, the youngest borrower’s age, and current interest rates. Borrower to remain current on their property taxes and homeowners insurance and HOA fees, occupy home as primary residence and maintain the property. In a reverse mortgage, the payment stream is ‘reversed’: instead of monthly payments to a lender, a lender makes payments to the homeowner, either through a line of credit, lump sum, or monthly installments. Many reverse mortgages are insured by the Federal Housing Authority (FHA); insured reverse mortgages are also known as Home Equity Conversion Mortgages (HECM).

Reasons for a reverse mortgage span the entire financial spectrum of ‘needs’ and ‘wants’. Whether borrowers need to pay down medical debt, make necessary home repairs, or are looking to help their children’s finances or provide for their grandchildren’s education, the versatility of an HECM makes it a great solution for many older homeowners.

How do reverse mortgages work with interest rates?

There are two options in interest rates: adjustable interest rate versus fixed interest rate. The interest rate factor affects how money is paid, whether in a lump-sum distribution at closing, a guaranteed monthly income or a line of credit. Typically, borrowers have more choice in an adjustable rate mortgage fees.

HECM borrowers should also consider their funds disbursement options. There is a limit on the amount of money that can be withdrawn in the first year (60 percent of total eligible amount). Mandatory obligations, like existing mortgages or liens on the borrowers’ property, will need to be paid before the borrowers’ receipt of funds. HECMs allow for the withdrawal of funds to pay off those obligations exceeding the 60 percent limit, plus another 10 percent of the maximum allowable amount. A reverse mortgage remains a great option for those with debt obligations.

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Qualifying for a reverse mortgage: how it works

Qualifying for a reverse mortgage is less complex than a typical home equity loan.  Approval for a reverse mortgage is based on a sliding scale tied to the homeowners’ age and the appraised value of the home, not on credit history, employment or income. It is important that borrowers seek counseling, ideally with other family members present, to discuss the best fit for their needs.

The money received from a reverse mortgage can be used for any purpose. It is considered tax-free income and will not affect Social Security or Medicare benefits. The homeowner continues to pay property taxes and insurance.ranch style home with manicured lawn

In a reverse mortgage, the homeowner is not giving up title or their right to the home in any way. The program is regulated and insured by the FHA and guaranteed by U.S. Housing and Urban Development (HUD).

The repayment amount may not exceed the value of the home, even if the home value changes from the time the loan started. A reverse mortgage is a ‘non-recourse’ loan, so that even if the appraised value of the home drops below the reverse mortgage balance, no other assets from the owners or the heirs can be attached to repay the loan. If a balance is due when the loan is repaid, this is paid to the lender by the FHA insurance fund. The borrower or his/her heirs have the option to refinance the home and keep it in the family, or sell it and keep the remaining equity after loan repayment. (The equity may be depleted.)

Still have questions about how a reverse mortgage works? David Chee is an experienced reverse mortgage specialist. Call him today at (800)967-3575, or request a free quote.

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