What is a Reverse Mortgage?

A reverse mortgage is a home loan product that is commonly offered to senior citizens. This type of mortgage is actually designed to create a source of regular income for the homeowner. Here are the basics of the reverse mortgage and what it can do for homeowners.

Reverse Mortgage

With a traditional mortgage, you are slowly purchasing the equity in your home from a lender. With a reverse mortgage, the lender is slowly purchasing the equity in your home from you. In order to get involved with this type of program, you have to either have your house completely paid off for have a very small mortgage balance.

How it Works

With this type of program, a homeowner will set up a reverse mortgage with a mortgage lender. They will agree to a certain interest rate and a monthly payment. Over the course of several years, the mortgage lender is going to send a monthly payment to the homeowner. The homeowner is then free to use this money however they see fit. The mortgage lender is going to continue sending payments until a certain point has been reached. Typically, the mortgage lender will not allow the homeowner to borrow 100 percent of the value of their home. For example, they might only allow them to borrow a maximum of 80 or 90%. At that point, the payments  from the mortgage lender will cease. 

Paying Off a Reverse Mortgage

In order to repay a reverse mortgage, there are a few different things that could happen. If you decide to move to a new house, once the house is sold, you will have to repay the mortgage lender before you can keep any of the money. If you are the last surviving spouse in the home, your life insurance money could also pay off the mortgage.

Will You Lose Your Home?

Many individuals are afraid of a reverse mortgage because they fear that they will lose their homes whenever the bank finishes paying them for their equity. However, this is not the case with a reverse mortgage. You are allowed to live in the home until you die if you desire. The bank will only be paid whenever you decide to sell the property or when you die. This means that the bank will not try to collect any money from you in the form of monthly payments until you are ready to move out of the property.

FHA HECM Program

The FHA HECM program is one of the most popular reverse mortgages around. HECM stands for home equity conversion mortgage. This is a reverse mortgage that is backed by the federal government through the FHA. In order to qualify for this mortgage, you and your spouse has to be at least 62 years of age. You also have to have a very small mortgage balance and you have to attend a consumer information session with an approved HECM counselor. There are no financial restrictions with this type of mortgage and you can finance the closing costs into the loan.

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