Real Estate Loans: Reverse Mortgages Explained

A reverse mortgage is something that elderly individuals may take into consideration as one of their options if they are in need of funds

. It essentially allows you to use the equity in your home to get cash. In order to qualify you must first be 62 or older and own one of the following; condo, townhouse, mobile home, single family home, or multifamily home. Your home must also have equity and you must be using this dwelling as your permanent residence. You will receive payments or cash under a reverse mortgage as opposed to having to pay them under a traditional mortgage.

What is a reverse mortgage?

When you decide to apply for a reverse mortgage, the equity that you have built up in your home is released. The funds that you obtain are able to be used for anything you desire to spend them on. Very strict rules apply to the reverse mortgages and they are regulated by the Federal Housing Administration. Under most circumstances, once you have taken the reverse mortgage out you cannot owe more than the house is actually worth. You are given insurance from the federal government that you will still get the profit from your loan even if the company you decided to use ends up going out of business. Since standards are so strict, counseling is a requirement before you can obtain one to be absolutely certain that you know what the program entails.

Some people may mistakenly think that a second mortgage is the exact same as a reverse mortgage but it is not because a second mortgage requires you to make monthly payments. The only way that you are required to make payments under a reverse mortgage is if you end up moving out. Once you either sell the home or move from the home, your sale pays for the balance on the reverse mortgage. Any funds that remain after the loan is paid in full are redirected to your estate or you personally.

How does a Reverse Mortgage Work?

You have the possibility to choose the method of payment when you file the application for a reverse mortgage. You have the option of receiving a monthly payment, a lump sum, or a direct line of credit from a lender. In order for this to occur you need to provide proof of your age along with proof that equity exists in your home as well. You will also have to pay a monthly fee and closing costs on this reverse mortgage. The determination of how much money you are eligible for is directly dependent upon the value of your home, the older you are, and how much equity happens to be tied up in your home. Any money that you happen to get from a reverse mortgage can be applied to any purchase you choose.

It is possible to qualify for a reverse mortgage even if you owe money on your current mortgage as long as it is the only one on the home. You also need to pay off the current mortgage with some of the money you get from a reverse mortgage or with cash that you have reversed somewhere. The government limits the amount that you are able to borrow.

The money that you borrow is charged an interest rate but only those funds. The interest rate depends directly on a financial index and is variable. You are not required to pay anything on the interest as long as you are continuing to live in the home. These eventually get paid once you move out or pass away.

Should You Take a Reverse Mortgage?

A reverse mortgage can assist elderly people with getting funds for bills or even a vacation. As always, full research is needed before deciding to make any major financial decision.

by: Lori English

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