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How Reverse Mortgages Work

Feb 3, 2008
Reverse mortgages were created in order to help ease the financial burden on aging seniors. A reverse mortgage is a type of financial instrument that permits home owners over the age of 62 to gain access to the money they have accumulated as home equity.

How a reverse mortgage works is that the lender makes payments to the borrower, rather than the other way around. The amount paid out is based on a percent of the equity remaining in the home (that's the full property value minus the amount still owed).

Seniors can use money to fund:
* retirement;
* medical costs;
* a new car;
* home repairs;
* renovations;
* estate planning;
* a grandchild's education;
* travel and leisure;

In order to get a reverse mortgage your current mortgage does not need to be completely paid off. The amount you can receive is based on the equity in your home. As a mandatory part of the process, however, your existing mortgages will be paid off. Some people simply use a reverse mortgage to get out of having to pay monthly mortgage payments, the money they receive just being a bonus.

When you receive a reverse mortgage, your home remains in your name, and your retain total control of the property. It is also still your responsibility to maintain the house and property and pay all taxes and insurance as usual. No lender can take your home away from you so long as you keep that home as your primary residence.

If, however, all owners of the home (all names on the title and mortgage), leave their home permanently for any reason (including illness) the loan is then due and payable. This does not apply to extended hospital stays or vacations. Any absence lasting longer than 1 year simply needs to discuss the situation with their lender.

With a reverse mortgage there are several ways you can receive your money:
* one lump sum;
* regular monthly payments;
* a line of credit;
* any combination of the above.

Reverse mortgages do not affect your Social Security, nor do they affect your Medicare. SSI, however, may be affected depending on the terms of the specific loan program in question.

To qualify for there are no:
* credit requirements;
* income requirements;
* loan repayment requirement provided you remain in the home as your primary residence.

There can, however, be significant expenses associated with getting a reverse mortgage, though the majority of these costs can be financed into the reverse mortgage.

With a reverse mortgage, after your death, your estate will not be responsible for owing anything remaining on the mortgage balance. Some programs even allow you to set aside a portion of the value in your home to be protected and passed along with your estate when you pass. As a holder of a reverse mortgage, you are permitted to sell your home, the proceeds simply going to pay off the reverse mortgage before any funds find their way into your pocket.
About the Author
Somerset Mortgage Lenders has been in business since 1979. Whether you are looking to refinance your mortgage, consolidate your debt, improve your home, we can help. Call us toll-free at 1-800-675-9783 or visit us online.
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