How Does a Reverse Mortgage Work? Learn The Basics, The Benefits And The Disadvantages

How Does a Reverse Mortgage Work? Learn The Basics, The Benefits And The Disadvantages

Posted on 20 December 2012.

If you have been wondering, “How does a reverse mortgage work?” you are not alone. There has been a lot of talk recently about these reverse mortgages and whether they are a good idea or not. If you’re looking for the correct information about these mortgages without any hype, sales talk or misinformation, you’ve come to the right place.
What is a reverse mortgage?
A reverse mortgage is the complete opposite of a regular mortgage. With a reverse mortgage, the person borrowing the money receives payments every month from a lender instead of making these payments himself. Even though you are receiving money every month instead of sending it out, it’s still considered a loan.
Eligibility
Not everyone that owns a home is eligible for a reverse mortgage. In order to qualify for one you’ll have to meet the specific requirements.
1. You must be 62 years old or older.
2. All people that have their name appearing on the deed to the house must sign the application.
3. You must be living in the home that is being used to secure this mortgage.
4. The balance on the home needs to be low or it must have been paid off in full. If you’re dealing with a lower balance, it needs to be in an amount that’s low enough for the income from the mortgage to pay it off.
5. These eligibility requirements must be met by all applicants.
Your home’s value
One of the criteria for determining whether your reverse mortgage application will be approved or not is the value of the home and how much is owed on it. Basically it comes down to this. The more value that is in your home and the less you still owe on it, the more likely you are to get approved and the higher your payments will be. Once approval has been granted, you’ll be given the choice for receiving your payments. You can choose to receive the money for the loan in monthly payments, as a line of credit, in a lump sum or as a combination of payments.
The benefits of a reverse mortgage
One of the questions that’s most asked along with, “How does a reverse mortgage work?” is how flexible they are. In other words, how can you spend your money once you have received it? The good news is that there are no limitations set for how this money is used. You have the option of spending the money in the way you best see fit. As long as you continue to reside in the house, you’ll never have to worry about making any more mortgage payments and instead can expect to see money flowing into your bank account on a monthly basis.
The disadvantages of a reverse mortgage
While the loan itself is flexible, you will not have any flexibility as to your choice of residence. You will have to live in the home for as long as the mortgage is continued and if you ever decide to move you’ll have to pay off this reverse mortgage in full. In some cases things can come up in the future that you don’t always plan, and with a reverse mortgage in place you can get stuck. As well, if you should pass on while the mortgage is still due, this amount needs to get paid either by your estate or your heirs. If neither have enough money to pay off the mortgage in full, the lender has the right to foreclose on your property.
Associated costs
There are some associated costs that accompany a reverse mortgage that you should know about. These costs may not be discussed until you’re in the final stages of your mortgage planning and you should definitely know about them ahead of time. The responsibility of paying the insurance and taxes on your house will still be left to you and if you happen to run into any problems paying them, it can be considered a default of your mortgage agreement. In this case, you would have to pay off the full amount right away.
You’ll also need to cover the closing costs for the mortgage. Just like a regular mortgage, a reverse mortgage has closing costs as well that need to be paid before the mortgage goes into effect.
There may be other associated costs and the only way to know exactly what they are and how much they will cost you is to go through all of the fine print on a reverse mortgage agreement before signing it. As well, for the small amount that it will cost, it would be a good idea to get a lawyer to look through the paperwork before setting pen to paper. This way you will be able to ask a qualified professional, “How does a reverse mortgage work?” yourself and find out all the details for the specific mortgage that you are planning on taking on. This way you’ll be able to sign the paperwork with confidence knowing that your best interests have been kept in mind.