Reverse Mortgages: How They Work And Who They’re For

Understanding Reverse Mortgages

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A reverse mortgage, also known as a home equity conversion mortgage (HECM), is a loan that allows homeowners over the age of 62 to access the equity in their home. The loan does not have to be paid back until the last surviving homeowner dies, sells the home, permanently moves away, or fails to comply with the loan terms.

How Reverse Mortgages Work

Reverse mortgages are available from a variety of lenders and come in a number of different forms. All reverse mortgages are based on equity, which is the difference between the value of a home and the amount of debt still owed on it. The amount of equity available for a reverse mortgage depends on a few factors, including the value of the home, the age of the youngest borrower, and the current interest rate. The lender will also take into account any existing loan balances, closing costs, and fees.

Eligibility Requirements

In order to be eligible for a reverse mortgage, homeowners must meet certain requirements. Homeowners must be at least 62 years old, occupy the home as their primary residence, and have enough equity in their home. Homeowners must also complete a counseling session with an approved housing counseling agency. Additionally, the home must be in good condition and free of any liens.

Types of Reverse Mortgage Plans

There are two types of reverse mortgages: the fixed-rate option and the adjustable-rate option. With a fixed-rate reverse mortgage, the amount of money the homeowner receives is set at the time of the loan. This amount does not change throughout the duration of the loan. With an adjustable-rate reverse mortgage, the amount of money the homeowner receives can change over time. The rate of the loan is tied to a financial index, such as the London Interbank Offered Rate (LIBOR).

How Payments Work

Homeowners can receive their proceeds from a reverse mortgage in a variety of ways. They can choose to receive it in a lump sum, as a line of credit, as monthly payments, or as a combination of the three. Homeowners can also choose to defer payment of the loan until after their death, allowing them to remain in their home for as long as they wish.

Special Considerations

It is important to note that reverse mortgages are a form of loan. As such, they must be repaid. The loan balance is typically due when the last surviving borrower dies, permanently moves out, or fails to comply with the loan requirements. If the loan is not repaid, the lender has the right to foreclose on the home.

Who Is a Reverse Mortgage Good For?

Reverse mortgages can be a good option for seniors who are looking for an additional source of income or who want to use their home equity to pay for other expenses. For example, a reverse mortgage can be used to pay for medical expenses, home repairs, or other living expenses. Additionally, seniors who are looking to remain in their home despite financial limitations may find a reverse mortgage to be a good option.

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