What is a Reverse Mortgage and How Does It Work?

A reverse mortgage has only been a form of home equity lending since 1989 when it was first offered. The idea is that it provides a federally-insured way to release some of the value stored in your home equity without needing to move out or sell up right away.

A stream of income, line of credit or a lump sum is paid to the borrower using the home equity conversion mortgage (the other name for a reverse mortgage). It is repaid after selling the property or through probate following the death of the homeowner(s).

Who Is Best Suited to a Reserve Mortgage?

You must be a homeowner and 62 years or older (the youngest person with a couple is counted). As the loan repayment is triggered following a sale of the property, it’s best that you plan to stay in the home indefinitely. Usually, but not always, this type of loan is taken out by pensioners and people looking to shortly retire who would like to release some of the equity in their home without needing to move out and downsize.

It’s possible to sometimes use a reverse mortgage to clear a minor outstanding balance on an existing mortgage to smooth the way to retirement years. However, bear in mind that an application through leading provider American Advisors Group requires passing a credit check.

Could I Receive an Income or a Lump Sum?

When you have a fixed interest rate mortgage, then you can only get a lump sum payment with a reverse mortgage. However, with an adjustable interest rate mortgage, there’s the choice of a line of credit, a lump sum, a fixed monthly income, or a mixture of these.

How Much Can I Borrow?

There is a HECM limit for these types of mortgages currently set at $636,150. However, should the appraised valuation be lower, then this is used instead. The homeowner can review what percentage of their home they wish to use for a reverse mortgage – essentially, how much they’ll give away and won’t be eligible for future inheritance for their relatives. Therefore, the amount depends on the valuation used and what percentage ownership is borrowed against.

Also, different lenders charge an interest rate that could vary depending on the applicant(s) credit score or mortgage type too. If you’re having a hard time figuring out the rates and the available values you can get for your reverse mortgage, you can opt to make use of a reverse mortgage calculator in order to get a clearer idea on potential valuations.

Final Thoughts

A home equity loan is a useful financial lending option for homeowners who are old enough to qualify and who do not mind borrowing against the value of their home. It can certainly bridge the gap between the income needed to fund retirement needs and not having enough. Interest rate costs do reduce what is received from the equity in the home upon sale, but this is a reasonable trade-off to avoid the expense of selling up and relocating or downsizing to get some extra cash to live on in your silver years.

In most cases, it’s recommended by financial advisors to tap other sources of income before taking out new lending agreements. This is sensible advice as you’d expect from these types of advisors. However, few financial advisors have ever lived off their own investments in retirement, so their word is certainly not gospel! For homeowners who wish to retire slightly earlier or in greater comfort, then a reverse mortgage is a good extra option to have available that didn’t even exist that long ago.

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