What’s a Reverse Mortgage and How Does it Work?

A reverse mortgage is a little bit complicated and a little bit simple. It’s complicated because it’s not always easy to understand the process, but it’s simple once the pieces finally click and you understand how the entire process works. What confuses most people is the fact that it’s a mortgage, but it means you have no payments to make. How does that work? Because most of us would be quite happy to sign up now so that we can get money, not have to pay it back and live mortgage-free for the rest of our lives. Sounds pretty simple, right? Well, it’s not quite that simple.

This kind of mortgage is available only to homeowners older than 62. It’s based on the equity of a home and it’s based on many other factors, such as age and interest rates, the appraised value of a home and the sales prices of a home. This is where it gets a little bit complicated. Essentially, the same factors that go into applying for a mortgage or refinancing your home are considered when applying for a reverse mortgage with the exception of the fact that the mortgage money is given to you and you don’t have to pay it back.

These loans are guaranteed by the FHA, and even homeowners that have a mortgage on their current home may apply for this kind of loan. However, if you do have a mortgage on your home, your reverse mortgage proceeds will go to pay that off first and the remainder of the loan value is yours to keep. It’s important to note, however, that not all the proceeds from your new mortgage are yours to do with what you please right away. The use of your funds is sometimes restricted by certain lenders in the first 12 months of the loan. What this means is that while you are free to keep the money to do with it what you please, you might have to wait a year before you do that.

Eligibility

To be able to apply for a reverse mortgage, the youngest borrower on a home loan has to be at least 62 years of age. There is no exception to this rule. What this means is that if you are 62 and your spouse is 59, you don’t qualify. You are ineligible for this loan and it’s because you don’t meet the minimum age requirements. Additionally, you will have to prove your income, show your housing information and you will need to meet the rest of the restrictions as they are qualified by HUD. These qualifications might differ slightly from state to state, so please check with your local HUD office to determine whether or not you meet the eligibility requirements for this kind of reverse mortgage.

You, however, are not the only one that has to meet eligibility requirements for a reverse mortgage. Your home must also meet the requirements. Fortunately, most homes do just that. The FHA requires that your house be a single family home, a townhome, an approved condo or even a mobile home so long as they meet FHA requirements in terms of safety and other ratings. Remember – banks want to know that the dwelling against which you are borrowing is going to sell and allow them to earn their money back as quickly as possible when you no longer reside in the residence.

Responsibility

The good news is that not having a mortgage makes your life a lot simpler, a lot more affordable and a lot less stressful from this point forward. However, the other issue is that you do have to pay back the loan. When taking out a reverse mortgage, you have to consider your heirs. What this means is that when you pass away or sell your home, you have to pay back the mortgage the same way in which you would pay back a traditional mortgage. If you die, your children or whomever it is that inherits your estate will be responsible for paying back the money you owe on your house. The bank allows 6 months after the death of the final owner of the home before the full repayment amount is due. This gives your heirs six months to sell your home and use the proceeds to pay off the mortgage that you have been using to live on.

Here is where the good news comes into play. When your heirs sell your home, they are not saddled with the remaining debt of your home’s mortgage if it does not sell for the amount that is owed. Your heirs are required only to pay the value of the loan or the appraised value of the home when it is sold – whichever is less. If the house sells for more than is owed, your family can keep the remainder of the value. If it does not, they are not required to begin selling your jewels or furniture to pay off the remainder of your loan.

Funds

There is no way to determine what kind of funds you will receive when you apply for a reverse mortgage. It all depends on what you qualify for, what your lender offers and what you choose if that is the case. You could end up with a lump sum at closing, which means the amount of the loan is deposited into your bank account. You could have a home equity line of credit that requires you to draw on the loan when you need funds. You could end up with a tenure, which means you’ll receive monthly payments over the life of the loan in the same amount every month. We cannot tell you which you will qualify for, but your lender can give you some advice.

Is a reverse mortgage right for you? It’s not a question we can answer on your behalf, but hopefully our advice helped to answer some of your questions and provide you with some insight as it pertains to making your final decision.

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