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How a reverse mortgage works

Figuring out the workings of a reverse mortgage can be a delicate process, as you have to be above a certain age and have a house that qualifies for one. Below, we delve into how a reverse mortgage works, its salient benefits and how some even use it to pay off the remaining portion of their existing mortgage.

  • Counseling session held by HUD
  • Home equity falls in a reverse mortgage and debt increases
  • Minimum qualifying age of 62-years and other criteria
  • An appraisal and inspection of the home is required
  • Owners can get payments as monthly sums or a line of credit
  • Owners do not need to make monthly re-payments
  • Advantage of being able to pay off an existing mortgage

Getting Information about a Reverse Mortgage

Prospective borrowers should first read magazines, or go online to learn more about a reverse mortgage.

In the United States a counseling session is held with the home owner before they apply for a reverse mortgage. Usually such counseling sessions are held by the U.S. Department of Housing and Urban Development (HUD) and the home owner will be provided with an overview of a reverse mortgage.

Home Equity in a Reverse Mortgage

One of the vital elements in a reverse mortgage is that the home owner’s equity in the house falls over time while the debt increases. This element is an exact reverse of a traditional mortgage and is why this loan is termed as “reverse”.

Qualifying age and Criteria

Being above 62-years of age is one of the criteria for qualifying for a reverse mortgage. In case of two or more borrowers the age of the youngest will be taken into consideration and result in the amount available as a reverse mortgage being lowered. People who are looking for a reverse mortgage also need to own their home or have a low balance on the initial mortgage.

Home Appraisals and Inspection

Prospective borrowers who meet the qualifying age requirements have to get an appraiser to conduct an inspection of their home. After the inspection the amount available will be calculated in the subsequent underwriting stage.

More about Reverse Mortgage Payments Modes

You can opt to get a reverse mortgage payment in several ways, and many senior citizens who want an extra bit of money for expenses can get a monthly payment. Alternatively they can choose to get the reverse mortgage payment in the form of a line of credit and use it when needed. Additionally the payment can be availed in a large sum.

Monthly Mortgage Payments

Monthly mortgage re-payments are not required as part of reverse mortgages and the amount provided as a loan is only repaid when the home is sold or the borrower dies. At that time, any remaining money after the principal, interest and fees for the loan have been repaid goes to the borrower or their heirs.

Paying for an Existing Mortgage

Using the money from a reverse mortgage any balance on the existing mortgage of the house can be paid off. The remaining money can be used by the borrowers to fund renovations to their house or used for monthly expenses.

An important benefit of a reverse mortgage is that a spouse listed on the HECM will be able to live in the house, while maintaining it, even after the borrower dies.  With the benefits of a reverse mortgage outweighing the disadvantages they are being increasingly used by senior citizens on a limited monthly income.