Many seniors wonder how does a reverse mortgage work. As its name implies, a reverse mortgage is opposite of a typical one. In a regular mortgage, the borrower secures a loan and makes monthly payments toward it. In a reverse mortgage the lender gives either a lump sum or a stream of monthly payments to someone who already owns a home.
Reverse mortgages have several requirements and stipulations. The first and most important being that one must be at least 62 years of age to qualify. These loans are specifically meant for seniors. The goal of a reverse mortgage is to allow a senior to cash out equity in their home without subjecting them to a risk of future foreclosure or having a loan payment to make.
Most home equity loans require monthly payments. When you take out a second mortgage, that loan requires payment. However, a reverse mortgage requires no payment so long as the borrower continues to occupy the home. Payment of the reverse mortgage is only triggered by one of three occurrences. This first of these is if the borrower dies.
The second is if the home sells. The third trigger for repayment is if the borrower no longer occupies the home for other reasons. One common reason is transition to long term care. Other than these reasons there is no payment required towards the balance of the reverse mortgage. This means that there is no possibility of default hence foreclosure.
Reverse mortgages require that any existing first or second mortgages against the property be repaid. This often occurs at closing with the first portion of the reverse mortgage being used for this purpose. The remaining amount available is then disbursed to the borrower. This can be done in one of two ways. The borrower on a reverse mortgage can elect to take this amount in a lump sum.
Alternatively, the borrower can elect to take the proceeds in monthly payments. These payments arrive every month and are very much like an annuity. The amount available with a reverse mortgage is driven by several factors. The first factor is the age of the borrower. The older the borrower means the more that can be accessed via a reverse mortgage.
Another important factor in determining the amount available is the appraised value of the home. The higher the value then obviously the more that can be borrowed against it. If you elect monthly payments, then the total amount received is higher than that in a lump sum payment. Other local factors influence the amount which can be borrowed and vary by county.
There are many good free resources online to explain how does a reverse mortgage work. These loans can be excellent for seniors. However, it is important they avoid unscrupulous lenders. HUD requires a free educational session for seniors prior to signing for one of these loans. This education is important and should be heeded.
