How Does a Reverse Mortgage Work

The reverse mortgage is quickly becoming a popular option for seniors on a fixed income. In short, it allows them to draw upon the equity of their home in order to pay for mounting living and medical expenses. The mathematics behind them is very simple and more and more lenders are offering reverse mortgages as an option. Reverse mortgages have some great advantages, but also some disadvantages.

Reverse mortgages will provide a lump sum or several payments to a homeowner. This money comes from the equity in the homeowner’s property and home. Reverse mortgages ‘defer’ the need to repay this loan until the home is sold, or the principle owner dies or leaves. Unlike a traditional mortgage under which monthly payments are made to a lender, each of which increases their equity in the property, a reverse mortgage does not involve any payments to a lender. The interest is simply added to the property lien.

In order to qualify for a reverse mortgage, the homeowner must be 62 or older. There is no credit check and no income requirement. For mobile home owners, the building must have been built after 1976 and be placed on a permanent foundation. Depending on the type of reverse mortgage, there may be several qualifications placed on how the money can be used. In some cases, the borrower will be required to pay off the traditional mortgage prior to receiving personal funding. Finally, when applying for a personal mortgage, it is important to note that a pending bankruptcy will not prevent a borrower from securing a reverse mortgage, but it may hold up the process.

Reverse mortgages end under several different conditions. The following events are considered end of term events:

• Death of homeowner
• Sale of property
• Homeowner leaves property for more than 12 months (i.e. to obtain nursing care)

Once one of these qualifying events occurs, it is possible to make arrangements to pay off the reverse mortgage. If the property is sold, proceeds from the sale must be used to pay off the balance remaining. If it is not sold, the heirs can attempt to refinance the property under a traditional mortgage scheme. Once the reverse mortgage is paid off any additional monies from the sale of the property revert to the heirs. If the sale did not cover the amount of the reverse mortgage, the lending institution will write off the differences.

While the reverse mortgage is an excellent option for seniors with equity in their home, it does have some drawbacks. The major drawback is the start-up costs. These can be very costly and often prevent seniors from attempting to secure a reverse mortgage the government has several different programs that are in place to assist seniors with finding the best loan and understanding all of the terms.

Any senior citizen, who is on a fixed income and facing increasing medical or other living expenses, may want to consider a reverse mortgage. By working closely with a loan officer, it is possible to find a loan that will allow you to remain in your neighborhood and home for as long as your health allows.