A reverse mortgage is considered to be a type of loan that allows homeowners of ages 62 and older, basically those who have been able to pay off their mortgage, to borrow part of their home’s equity as tax-free income. Unlike a regular mortgage in which the homeowner makes payments to the lender, it’s the reverse of the usual regular mortgage. With a reverse mortgage, the lender pays the homeowner.
Homeowners who opt for this kind of mortgage don’t have a monthly payment and don’t have to sell their home (in other words, they can continue to live in it which is quite beneficial), but the loan must be repaid at all cost if the owner dies, sells the house or moves out permanently from it. If you’re on this posting, you’re probably looking to gain more information on what reverse mortgageis and possibly an answer to the question “how does a reverse mortgage work?”
Here, we will give well detailed information on everything you should know about reverse mortgage, just in case it’s something you or a close friend is considering doing. He or she may need to gather all reverse mortgage information he or she can get.
How does a reverse mortgage work?
Despite the reverse mortgage concept in practice, qualified homeowners may not be able to borrow the entire value of their home even if the mortgage is paid off, obviously most mortgage banks would never agree to such deal due to past experiences with most people that refused to pay their dept.
The amount a homeowner can borrow, known as the principal limit, varies based on the age of the youngest borrower or eligible non-borrowing spouse, current interest rates, the HECM mortgage limit ($765,600 in 2020) and the home’s value.
Homeowners are likely to receive a higher principal limit the older they are, the more the property is worth and the lower the interest rate. If you choose a HECM with a fixed interest rate, on the other hand, you’ll receive a single-disbursement, lump-sum payment. The interest on a reverse mortgage increases almost every month, and you’ll still need to have adequate income or source of income to continue to pay for property taxes, homeowners insurance and upkeep of the home as well.
What can a reverse mortgage be used for
Supplementing retirement income, covering the cost of needed home repairs or paying out-of-pocket medical expenses are common and acceptable uses of reverse mortgage proceeds. You could even use it to pay for important bills such school fees, or go further to use the money for an investment in other to procure more funds for yourself which would eventually help you pay off the dept you incurred by taking a reverse mortgage at first.
“In each situation where regular income or available savings are insufficient to cover expenses, a reverse mortgage can keep seniors from turning to high-interest lines of credit or other more costly loans,” McClary says.