Reverse mortgages work like traditional mortgages, only the other way around. Instead of paying your lender each month, the lender pays you These payments are actually cash advances against the equity in your home. With a reverse mortgage, instead of the landlord making payments to the lender, the lender makes the payments to the homeowner. The landlord can choose how to receive these payments (we will explain the options in the next section) and only pays interest on the profits received.
Interest is accrued on the loan balance so that the landlord does not pay anything in advance. The owner also keeps the title to the property. Over the life of the loan, the homeowner's debt increases and the equity of the home decreases. When you have a regular mortgage, you pay the lender every month to buy your home over time.
In a reverse mortgage, you get a loan where the lender pays you. Reverse mortgages are part of the equity in your home and turn it into payments to you, a kind of prepayment of the equity in your home. The money you receive is normally tax-free. You usually don't have to pay back the money while you live at home.
When you die, sell your home or move, you, your spouse, or your estate will repay the loan. Sometimes that means selling the house to get money to repay the loan. A reverse mortgage is a loan secured by your home that converts your capital into cash. In a conventional mortgage, you make monthly payments to your lender.
With a reverse mortgage, the bank pays you with the equity in your home. There are no restrictions on how you can use the money. If you buy those types of financial products, you could lose the money you get from your reverse mortgage. Because the money you receive from a reverse mortgage isn't considered income, it's tax-free and won't affect your Social Security or Medicare benefits.
Both a reverse mortgage and a home equity loan use the equity in your home to provide you with readily available cash. Reverse mortgage principal, interest charges, and service charges (if applicable) are paid with the sale or refinance of the home. If you own a higher-value home, you may receive a larger loan advance on a proprietary reverse mortgage. And ask lots of questions to make sure that a reverse mortgage could work for you, and that you're getting the mortgage that's right for you.
It may be a good idea to refer to the reverse mortgage in a will or estate planning document. As with any mortgage, there are conditions to keep your reverse mortgage up to date, and if you don't meet them, you could lose your home. It is also possible to use a reverse mortgage called “HECM” to buy a different home than the one you currently live in. In either case, you'll usually need at least 50% of the equity based on the current value of your home, not what you paid for it to qualify for a reverse mortgage.
In addition, reverse mortgage eligibility standards are often relatively easy to meet if you have enough equity in your home by the time you turn 62. The amount of funds available from a reverse mortgage is based on the age of the youngest borrower, the value of the home and the current interest rates. Supplementing retirement income, covering the cost of necessary home repairs or paying out-of-pocket medical expenses are common and acceptable uses of reverse mortgage income, according to Bruce McClary, spokesman for the National Foundation for Credit Counseling. That said, heirs may also qualify to pay a percentage of the home's value, depending on how their appraisal compares to the reverse mortgage itself.
In the current economic climate, many older homeowners are researching a reverse mortgage as a way to produce additional income over their declining years. .
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