What Is A Reverse Mortgage
… And How Do Reverse Mortgages Work

A reverse mortgage is type of loan that is only available to senior citizens above the age of 62. It is taken against a home’s equity or part of a home’s value. The loan is called “reverse” because contrary to traditional loans where the borrower makes payment to a lender on a monthly basis, the lender makes monthly payments to the borrower. The borrower is not required to pay the loan until the home is vacated or sold. As long as you still live in the home, you will not have to pay anything towards the loan balance.

The bank or lender gives a predetermined amount of money every month until the loan total amount of money is reached. To be able to receive this loan, you should be the owner of a home or a have small mortgage. The money received can be used for anything. There are no restrictions on how you can use the money received from a reverse mortgage. Most retires use the cash to supplement their monthly income, pay off debts, pay for their healthcare needs or to finance home improvement projects.

The best thing about a reverse mortgage is the fact that you can never borrow an amount that is higher than the value of your home. If the balance that you are supposed to pay is less than the value of your home, you or your heirs will be allowed to keep the difference.

Factors That Determine The Loan Amount

There are multiple factors that determine the amount of money that you are going to be awarded by the lender. The money awarded can be received as fixed monthly payment, as a lump sum or as line of credit. The factors that affect that mount that you are going to receive include;

1. The value of the home: The higher the value of your home, the higher the amount of money that you are going to receive.

2. Your age or the age of the younger spouse if you are married: The older you are, the more the amount of money that you are going to get.

3. The lending limit: There are some areas with reverse mortgage lending limit.

Important Things That Should Be Kept In Mind When Taking a Reverse Mortgage

1. Have an estimate of the amount of money you owe. The payment structure of this type of mortgage means that at any point in time, you will only owe what you have received, plus the fees charged by the lender, plus interests.

2. Examine the loan documents carefully. Check all the important details. Verify that you will be charged interests and any other fess on a monthly basis. Check if there are fees that you will be charged if repay the loan early (i.e. before the entire amount has been paid to you).

3. Weigh your home’s value against the estimated debt. The comparison should be done using the current value of your home. Remember, you may not be able to sell your home if your debt is close to its value. This is because of the cost incurred when selling a home.

4. Consider taking a reverse mortgage if you have the intention of leaving your home in 2 to 3 years. This is because reverse mortgage are expensive. If you are planning to stay for longer, there are other less expensive options to consider. Also, if you are planning to leave your home to your children, you should consider other options.

5. A reverse mortgage will not affect your eligibility to Medicare or Social Security benefits. However the funds that you receive should be used immediately if you are on Supplementary Security income or Medicaid. This is because the funds can have an impact on your eligibility. Any residual funds that will be available in your bank in the next month will be considered as part of your assets (http://www.reversemortgage.org/gethelp/mostfrequentlyaskedquestions.aspx).

6. The interest charged will only be on the proceeds that you have already received. Both variable and fixed interest rates are available. The interests compound until he time you repay the loan.

7. You will have to pay servicing fee every month. This fee cover the cost associated with the administration of your reverse mortgage loan. This includes things like maintaining accurate records, tracking your property taxes, tracking your hazard insurance, issuing statement of accounts, certifying occupancy status, collection payments, discharging your mortgage etc.

8. You can make partial prepayments to your reverse mortgage account. This is often done without any penalty. However, it is I important to sit down with your lender so that you can discuss partial prepayment options. This will help you learn more about the prepayment options that are available to you under the terms of the loan agreement.

Downsides Of Reverse Mortgages

Before rushing to apply, it is wise to know the disadvantages of reverse mortgages so that you can know exactly what you are getting yourself into. A reverse mortgage is a wonderful tool that should only be used when necessary.

A reverse mortgage is costly and complex. If you are not careful, it can affect your eligibility for Supplemental Security and Medicaid. That is why homeowners interested in this type of mortgage are required to get mandatory counseling from an independent third party. This is usually done for free. The counseling is meant to help you evaluate other options to ensure that you are making the right choice.

If you decide to go ahead and take the loan, you should expect to pay higher-than-average closing costs. The amount of money that you are going to pay as interest is generally higher than the amount that you would pay if you took a traditional mortgage.

Don’t forget that anyone who takes up a reverse mortgage is still responsible for the payment of taxes, repair costs and insurance. You have to comply if you don’t want to be forced to repay your mortgage earlier than you expected. Spending the funds you receive in your home diminishes the value of your estate. If you are planning to leave it to your heirs, you will be leaving them an estate that is of less value.

It is always important to explore other options available before tapping into your home’s equity (http://www.bankrate.com/finance/retirement/basics-of-reverse-mortgages-1.aspx). You should only consider reverse mortgage when the other options will not work for you.