How Does a Reverse Mortgage Work?

A reverse mortgage is a type of home loan that you don’t have to pay back while you live in the home. The loan is repaid when you sell the home, die, or move out. This type of mortgage is only available to senior citizens and allows them to take advantage of the equity built up in their home without selling it.

The cash can be paid in a single payment, as a monthly stipend, or in a line of credit, that you can draw on as needed. This would decrease or eliminate the equity in the home, while increasing the debt owed. If the value of the home increases after you take out the reverse mortgage, you could build equity back into your home, and perhaps take a second reverse mortgage later.

To get a reverse mortgage, you must be at least 62 years old. The borrowers would first need financial counseling from HUD. This is to make sure that the borrowers understand exactly what they are getting into. For instance, they will have to pay off their existing mortgage with the proceeds.

The amount of funds one can get from a reverse mortgage will depend on a number of variables. These include an appraisal, the interest rate, the borrower’s age, and others depending on location and condition of the property. Once the loan is cleared and obtained, and other obligations are met, the proceeds from the loan can be used for any purpose or reinvested.

In some cases, the proceeds from a reverse mortgage are not subject to taxes, but may or may not affect social security and Medicare benefits. . This is another reason for the financial counseling as the risks and benefits must be weighed and known prior to assuming the mortgage.

Another caveat is that taxes and homeowners insurance must be kept up to date to prevent defaulting on the loan. As long as the borrower understands the risks involved, a reverse mortgage can be a great way for senior citizens to take advantage of the equity they have built up for years, without having to sell their homes.