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Reverse Mortgages

What Can a Reverse Mortgage Accomplish?

A reverse mortgage converts home equity into cash. Like a forward mortgage, the borrower’s home secures the loan. It is called a reverse mortgage because money paid in by the homeowners over the years plus value appreciation is paid back to the homeowners, who retain the title and continue to live in the home.

When tapping into home equity increases cash flow or enables a change in living situation, homeowners can increase their options and enhance their quality of life. Allaying money worries diminishes stress and contributes to a longer, healthier, and happier life. A reverse mortgage can:

  • Supplement Social Security, pension income, or public assistance benefits
  • Postpone drawing Social Security benefits, thus increasing the monthly benefit
  • Provide an income the borrower cannot outlive
  • Stop mortgage payments
  • Prevent foreclosure
  • Pay for in-home care, medical expenses, and long-term care insurance
  • Prepare a home for aging in place
  • Pay off credit cards, debts, and existing mortgage balances
  • Buy a second home or a new home
  • Upsize, downsize, move to an active community, or relocate closer to family

How Do Reverse Mortgages Work?

In order to understand how a reverse mortgage works, it helps to compare it with a conventional mortgage.

Conventional Mortgage
Purpose: Provide funds for purchase of property.
Funds: Dispersed in a lump sum for the payment to the seller.
Payments: Borrower makes monthly payments to the lender to pay down the loan.
Approval Criteria: Purchase price and value of the property, down payment, borrower’s income, creditworthiness, financial assets, and other debt obligations.
Lender’s ROI: Repayment of the loan along with interest.
Loan Balance: Decrease with each payment.
Borrower’s Equity: Increases with each payment.

Reverse Mortgage
Purpose: Provide income for a variety of purposes.
Funds: Dispersed in monthly payments, lump sum, or as needed.
Payments: Lender makes payments to the borrower.
Approval Criteria: Value of property, the borrower’s equity, age, and ability to maintain the property.
Lender’s ROI: Proceeds from the eventual sale of the property.
Loan Balance: Increases with each payment.
Borrower’s Equity: Decreases with each payment.

Negative Amortization
Reverse mortgages amortize negatively. The payments the borrower receives add to the balance owed at the end of the loan and interest accrues at a fixed or adjustable rate. But the borrower will never owe more than the property is worth, nor can the lender seek access to other assets.

Borrower’s Obligations
The lender places a lien on a property, but as long as the borrower lives in and maintains the home, there is never any repayment obligation. Events that trigger repayment include a move to another home as principle residence or permanent absence (12 months or more), a specified maturity date, death of the last surviving homeowner, sale of the property, and failure to pay taxes and insurance or make repairs. The borrower may pay off the loan through the sale of the property or repayment at any time without penalty.

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