All You Need To Know About Reverse Mortgages

By Katy Gilligan
Updated July 2, 2015
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All You Need To Know About Reverse MortgagesMortgages, second mortgages, reverse mortgages, there are so many different types of mortgages than it can get quite confusing to know exactly which mortgage options are right for you. Although the term mortgage usually can be associated with money being loaned for home owner purposes, the different types of mortgages are used for different reasons, and people take out mortgages for specific purposes. Mortgages are used to help people purchase a home, while a second mortgage is used for quite a few purposes. A second mortgage can be used for home improvements, to pay off debt, or anything that requires a large sum of money. Below, reverse mortgages will be explained; what they are, how they are used, and how to acquire them, along with some of the disadvantages that come along with them.

A reverse mortgage, or a home equity conversion mortgage, is a mortgage designed for older homeowners or retirees, usually above the age of 62. This type of loan requires no monthly mortgage payments. This type of loan allows the homeowner to convert part of the equity in their home into cash. It is called a reverse mortgage because instead of making monthly payments to a lender, the lender make payments to the borrower. It is literally the reverse of a traditional mortgage. The reverse mortgage was made to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses. They can use the money in whatever way they want or need.

There are many requirements that the borrower must fulfill before getting their reverse loan, and after they get the loan, they must follow a list of responsibilities. Borrowers must be at least 62 years of age. The reverse mortgage must be the primary lien (a right to keep possession of property belonging to another person until a debt owed by that person is discharged) on the home. Any existing mortgage must be paid off using the money from the reverse mortgage. The house that is used as collateral for the reverse mortgage must be the primary residence. The home cannot be a vacation home or investor property. Although borrowers are not paying their mortgage payments, they must remain current on their real estate taxes, homeowners insurance, and Homeowners Association Fees (HOA Fees). Reverse mortgage borrowers much complete mandatory repairs and maintain a good condition on the property.

Other features of a reverse mortgage include the fact that in the first year (12 months), a borrower can only access 60% of the loan. In the thirteenth month of the loan, borrowers can take as much as they would like of the remaining balance of the loan.

Although a reverse mortgage is a great way to get money when an income is fixed, there are some disadvantages. There is a high interest rate, and up-front fees. Between these two fees, it could be surprising at how little money actually ends up in your pocket at the end of the day. When a person takes out a reverse loan, their heirs actually may not end up getting the house. With a reverse mortgage, the loan is paid off when you sell the home. So, if you die, the home is supposed to be sold so that the loan is covered. This means that your loved ones cannot have the house. No matter what you decide, either a reverse mortgage or not, make sure to do the research and make the decision that is best for you.





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