What is a Reverse Mortgage?

T he reverse mortgage concept is widely known to be a loan most beneficial for homeowners aged between 62 and older. Under a reverse mortgage, the aged homeowners have the choice of borrowing a part of the tax-free income from their home’s equity. In a regular mortgage scheme, the homeowner is supposed to pay money to the lender, whereas in the former, the stake man gives money to the homeowner. 

Homeowners that choose to utilize this kind of mortgage don’t have to put their homes on sale but the loan must be repaid in case the borrower passes away, shifts houses, or sells the place. 

Reverse Mortgages: How Do They Work?

The reverse mortgage practice is quite common nowadays. However, once the mortgage is paid off to the lenders, some qualified homeowners may still not be eligible to borrow the complete value of their house. The maximum amount a homeowner can borrow varies based on how old the borrower is, the home’s value, and current interest rates.

The older the homeowners get, the more likely it is for them to receive a higher principal amount with the increasing Home Equity Conversion Mortgage (HECM). Since the rates are variable, the options presented are as follows:

• A line of credit that can be assessed before it runs out
• As long as you stay in the house, you have to pay fixed monthly dues along with a line of credit
• Monthly payments are equal and for a fixed time period 

You will still need an adequate income stream to continue to keep paying for property taxes, homeowner insurance, and upkeep of the home. 

The Money from a Reverse Mortgage Scheme 

The amount that anybody is able to borrow with a reverse mortgage depends on the current interest rates, how much equity you have at home, the age of the youngest borrower, and the type of reverse mortgage loan you select. That process is much like the regular mortgages where you have to keep in mind the service fees, closing costs, and origination amount. 

In case you choose an option that is federally backed up, you will be required to pay mortgage insurance premiums. The expense can be subtracted from the loan amount so you will not have to pay it from your pocket but it will reduce the amount you receive after closing. Additionally, reverse mortgages tend to have higher interest rates than regular ones. 

Reverse Mortgages: The Pros and Cons

The process of borrowing against your home equity can really free up cash for living expenses but the premiums on origination and servicing fees always add to the amount. Mentioned ahead are some of the advantages and disadvantages of opting for a reverse mortgage:

Pros

• The fund can be utilized for healthcare and other expenses
• The borrowers can enjoy retirement through the funding
• Monthly payments are not required toward the loan balance
• The borrowers can stop the foreclosure by paying off the existing mortgage 

Cons

• Forces a borrower to take money against home equity which could be a key source of retirement money
• The closing costs along with the fees can be high

Avoiding the Scams

When you head out to shop for reverse mortgage programs, keep your eyes peeled for two common scam scenarios:

1. Contractor loans: You can possibly get convinced to opt for a reverse mortgage while applying for home improvement services.

2. Veteran loans: As a homeowner, you might come across commercials selling fee-free reverse mortgages for veterans. Keep in mind your state’s policy on Veteran Affairs. If that does not allow its citizens the option for reverse mortgages, the ads are to scam you.
   

If you want to avoid a scam, stay hyper-aware of these fraudulent schemes. If a company or individual is coercing you into signing a contract, it is more likely a call for danger.

All in all, a reverse mortgage lets aged homeowners have a resource to supplement their incomes and pay for other expenses such as healthcare and home renovations. Since there are certain eligibility requirements for who can apply for the loan, it is better to speak to the local HECM counselor to know more about your options. The latter might help outline the details and how this program can affect the homeowner once they pass away. 

Now that you know what is a reverse mortgage, secure your finances by considering it as an option.