What Is a Reverse Mortgage & How Can You Benefit

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If you are nearing retirement age, you have probably heard a bit about reverse mortgages, even if it’s just through commercials and ads. A reverse mortgage is unlike any other mortgage available. As the name implies, this type of loan works in reverse: you are able to access the equity in your home as a lump sum or line of credit without making loan payments. Only homeowners who have equity and are at least 62 qualify for this type of loan. If you meet the requirements, you may benefit from a reverse home loan.

There are many potential advantages with reverse mortgages. You will never need to repay the amount you borrow except if the home is sold, you move out, or you pass away. Heirs can walk away and surrender the home, but they will not owe more than the house’s value if they want to keep it. These loans also offer flexible terms with many ways to receive your money. This can make it easy to use the loan to finance a new real estate purchase, supplement retirement income, and more.

Reverse loans can be a bit confusing, however. The unique qualifications and rules governing these products are different than any other loan product. Not sure if you should consider a reverse loan? Here’s what you should know about how they work.

What Is a Reverse Mortgage?

A reverse mortgage is a unique loan option designed for seniors who own their own home. A HECM reverse loan is backed by the FHA and allows you to convert home equity into cash in the form of a lump sum, line of credit, or monthly payments. You will never need to make monthly payments on your loan. In fact, no repayment at all is due until you leave or sell the home or pass away. You will still be responsible for paying property taxes, homeowner’s insurance, and maintenance expenses, however, to keep the loan in good standing.

The amount you can borrow will depend on several factors, including the age of the youngest borrower, the appraised value of your home, how much you owe on an existing mortgage, interest rates, and the maximum loan limit. How much money you can access during the first year may also be limited and you may be required to set aside some proceeds to pay for insurance and taxes if the lender feels they may not be affordable.

As with other loan options, there are closing costs associated with a reverse loan. Your home will also need to be appraised before the loan goes through underwriting. Still, the process is usually faster than with a traditional home loan.