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LEGAL DICTIONARY

Reverse Mortgage

What Is a Reverse Mortgage Work?

A reverse mortgage is a loan secured by an item of real estate. They may be accessed by borrowers aged 62 or older with a sufficient amount of home equity.

Reverse mortgages are increasingly favored by seniors as a way to access the value of their estate before their death, without having to sell their property. However, it’s essential to know what signing a loan agreement for one entails.

How Does a Reverse Mortgage Work?

A reverse mortgage works differently from a conventional mortgage. In this kind, the loan agreement is not repaid in monthly installments but is instead paid back as a lump sum. It can also be received by the borrower either as monthly payments or as a single deposit.

Mortgage payments for reverse mortgages only become due in a few specific circumstances. The following events may trigger the repayment conditions of the money owed to the lender:

  • The death of the borrower
  • The sale of the real estate
  • The permanent relocation of the owner

Under federal law, these loans are structured in a way that prevents the loan amount from rising above the value of the property.

These measures ensure the owner’s heirs and estate are not on the line for any difference between the principal sum and the property’s value when the loan is eventually paid back.

How to Qualify for a Reverse Mortgage

To qualify for a reverse mortgage, there are a few criteria that borrowers must meet first. These include the following requirements:

  • You must be 62 years of age or older
  • You must fully own your home or property
  • The amount borrowed cannot exceed the property’s value

Additionally, factors such as your current age and the home’s values play a part in deciding how much you can borrow. However, unlike most other loans, there are no credit checks needed before approval is given.

Types of Reverse Mortgage

There are a few types of reverse mortgages offered by lenders. It’s important to choose the right kind for your circumstances, depending on why you wish to secure the funds.

Type of Reverse Mortgage: Lender: Granted for:
Single-purpose States and local governments A single purpose such as:
  • Home repairs
  • Home improvements
  • Paying property taxes
Proprietary Private companies Any purpose
Home Equity Conversion Mortgages (HECMs) U.S. Department of Urban Development (HUD) Any purpose

Advantages and Disadvantages of Reverse Mortgages

There are both positives and negatives of getting a reverse mortgage. They can be greatly beneficial if you need to access the value of your property’s positive equity without having to sell. However, there are some important downsides to be aware of too.

The advantages of reverse mortgages include the fact that:

  • You don’t have to sell your home to access the funds
  • The money you receive is tax-free
  • There are normally few restrictions on how you may spend the money
  • There is low risk to your property and finances
  • The loan cannot exceed the value of your property

There are however, a few important pitfalls to consider before taking out a reverse mortgage. These include the following disadvantages:

  • Getting one is sometimes complicated
  • You may have to pay higher fees than other types of loans
  • It could be more difficult to sell or rent out your home
  • Interest accumulates on the principal over time
  • It reduces the amount of inheritance you can pass on to your heirs

Helpful Resources:

Investopedia - Reverse Mortgage Guide With Types and Requirements

Consumer Advice - Reverse Mortgages

NewRetirement - Reverse Mortgage Disadvantages and Advantages

What Is a Reverse Mortgage Work?

A reverse mortgage is a loan secured by an item of real estate. They may be accessed by borrowers aged 62 or older with a sufficient amount of home equity.

Reverse mortgages are increasingly favored by seniors as a way to access the value of their estate before their death, without having to sell their property. However, it’s essential to know what signing a loan agreement for one entails.

How Does a Reverse Mortgage Work?

A reverse mortgage works differently from a conventional mortgage. In this kind, the loan agreement is not repaid in monthly installments but is instead paid back as a lump sum. It can also be received by the borrower either as monthly payments or as a single deposit.

Mortgage payments for reverse mortgages only become due in a few specific circumstances. The following events may trigger the repayment conditions of the money owed to the lender:

  • The death of the borrower
  • The sale of the real estate
  • The permanent relocation of the owner

Under federal law, these loans are structured in a way that prevents the loan amount from rising above the value of the property.

These measures ensure the owner’s heirs and estate are not on the line for any difference between the principal sum and the property’s value when the loan is eventually paid back.

How to Qualify for a Reverse Mortgage

To qualify for a reverse mortgage, there are a few criteria that borrowers must meet first. These include the following requirements:

  • You must be 62 years of age or older
  • You must fully own your home or property
  • The amount borrowed cannot exceed the property’s value

Additionally, factors such as your current age and the home’s values play a part in deciding how much you can borrow. However, unlike most other loans, there are no credit checks needed before approval is given.

Types of Reverse Mortgage

There are a few types of reverse mortgages offered by lenders. It’s important to choose the right kind for your circumstances, depending on why you wish to secure the funds.

Type of Reverse Mortgage: Lender: Granted for:
Single-purpose States and local governments A single purpose such as:
  • Home repairs
  • Home improvements
  • Paying property taxes
Proprietary Private companies Any purpose
Home Equity Conversion Mortgages (HECMs) U.S. Department of Urban Development (HUD) Any purpose

Advantages and Disadvantages of Reverse Mortgages

There are both positives and negatives of getting a reverse mortgage. They can be greatly beneficial if you need to access the value of your property’s positive equity without having to sell. However, there are some important downsides to be aware of too.

The advantages of reverse mortgages include the fact that:

  • You don’t have to sell your home to access the funds
  • The money you receive is tax-free
  • There are normally few restrictions on how you may spend the money
  • There is low risk to your property and finances
  • The loan cannot exceed the value of your property

There are however, a few important pitfalls to consider before taking out a reverse mortgage. These include the following disadvantages:

  • Getting one is sometimes complicated
  • You may have to pay higher fees than other types of loans
  • It could be more difficult to sell or rent out your home
  • Interest accumulates on the principal over time
  • It reduces the amount of inheritance you can pass on to your heirs

Helpful Resources:

Investopedia - Reverse Mortgage Guide With Types and Requirements

Consumer Advice - Reverse Mortgages

NewRetirement - Reverse Mortgage Disadvantages and Advantages