What is a Reverse Mortgage and How Does it Work?

What is a Reverse Mortgage and How Does it Work?
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Mike Randall
By: Mike Randall
Posted: November 11, 2013
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A reverse mortgage is a financial instrument that allows people over the age of 62 to access a portion of the equity in their home as cash payments.

In essence, it is a loan against the equity value of a home.

However, the big difference between a reverse mortgage and a home equity line of credit is the money received in a reverse mortgage does not have to be paid back until the house is sold or otherwise vacated.

Many seniors have become interested in reverse mortgage loans in recent years.

This may be due to the unexpected economic conditions we have experienced and the resulting loss of investment income. It may also be because of an increase in health care costs and a lack of affordable insurance.

The use of reverse mortgages is on the rise.

Is a reverse mortgage a good financial decision? As is often the answer to questions like this, it depends.

There are obvious advantages, including having access to liquid capital that can be used for just about any purpose.

Reverse mortgages also allow the homeowner to continue living in the home for as long as they want and are able to.

In addition, the payments from a reverse mortgage can be allotted in a number of ways, from equal monthly payments (called tenure), to a line of credit that can be drawn upon at any time.

“One of the biggest considerations

is leaving an estate for the heirs.”

Drawbacks or concerns that should be recognized:

For one thing, there are fees involved that can often be quite steep.

In addition, the interest rate is often higher than the going mortgage loan rate. If the homeowner is no longer able to live in the house, it must be sold and the loan settled within one year.

Finally, there are still expenses the homeowner is responsible for, including taxes and insurance.

If the equity in a home is withdrawn, and that is the greatest portion of an estate, there likely will not be anything left for any potential heirs.

Even if the loan amount that has to be repaid is less than the value of the home, it usually must be sold to cover the loan before any remaining value can be dispersed.

A reverse mortgage can be a way for many seniors to continue living in their home and meet any expenses that may arise.

While it might not be the best arrangement for every situation, it is often the only way for a retiree or someone on a fixed income to maintain their independence.

In any case, there are resources available from both the Department of Housing and Urban Development (HUD) and the FHA to help you decide whether this is the best choice for you.

Photo source: helpful.com.