Understanding a Reverse Mortgage

By: Jorge Lopez, January 8, 2016

Reverse mortgages have become an increasingly prevalent option for homeowners that are short on cash and need to do some financial planning.  So what exactly is it?  Generally aimed at older homeowners, it’s a type of home equity loan that unlike a regular mortgage, does not require monthly payments.  Instead, the loan is paid once the borrower moves out, the home is sold, or if he or she passes away.  Reverse mortgages are also recognized as a home equity conversion mortgage or HECM.

Reverse mortgages were introduced in 1989 by the FHA.  With these loans, borrowers that are at least age 62 or older can receive access to a portion of their home equity loan without the need to move.  The borrower receives payments from a bank based on a certain percentage of the home equity that has accumulated.  This money can be used however the borrower sees fit though most borrowers tend to use it as a means of supplemental income, to pay off existing debts or health costs, or for home improvement purposes.  Unlike a traditional mortgage, there is never a risk of owing more than the home is worth regardless of how much money is borrowed.

In terms of how much funds a borrower can receive, there are several factors that determine the amount including the age of the borrower, the home’s value, current interest rates, and other factors.  The borrower must also own the home or have a mortgage balance sufficiently low enough that it can be paid off with reverse loan proceeds when it comes time to close.

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