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How a Reverse Mortgage Works

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As bills pile up and maintenance on the home falls behind, elderly homeowners may turn to reverse mortgages for help. The problem is that most people don’t fully understand how a reverse mortgage works. Many believe it means they won’t be able to leave anything for their heirs or worse yet, may leave their heirs to inherit their debts. Let’s look at how reverse mortgages really work.

Defining a Reverse Mortgage

A reverse mortgage is a more practical form of home mortgage for older people on fixed incomes. Not only can using this form of loan to borrow against your home equity give you quick cash when you need it, but it won’t give you any extra monthly debts to pay. The loan won’t come due unless you pass away or move into a different place, such as an elderly housing facility. So, provided that you plan to stay in your home for a while, you will have a long time to pay back what you owe. Reverse mortgages give you the immediate freedom to do what you want during your retirement and enjoy life without the stress of regular loan payments.

When a Reverse Mortgage becomes due

There are three ways a reverse mortgage becomes due:

Homeowner has moved – When the homeowner moves out of the home or has not lived there as a primary residence for a year, the loan must be paid back.

House is sold – When the homeowner sells the house, they must use the proceeds to pay back the loan.

Homeowner dies – When the homeowner dies, the estate must be either sold or the loan paid back within six months.

In the event that the homeowner passes away, the heirs have a few options. They can choose to keep the property and pay back the loan amount, or they can choose to sell the property. If the house sells for more than the amount of the loan, the excess proceeds become part of the estate. In the event that the house sells for less than the loan, the proceeds are paid to the lender, but the heirs do not inherit the balance of the debt.

Reasons for taking out a Reverse Mortgage

In order to make it easier on senior citizens, the reverse mortgage type of loan created, allowing elders to use the equity of their homes rather than having to sell their homes. In the past, the only option that was available was to place their homes for sale. Without an adequate income, they had no other choice. Reasons for borrowing money could be anything, including any of the following:

Past due bills

Sudden healthcare expenses such as surgery or hospitalizations

Roof repairs and other home repairs

Vacation

Remodeling

New car

Now, with a reverse mortgage, seniors are able to enjoy their retirement without added financial strains.

Before deciding to take on a Reverse Mortgage

No one should consider a major loan like this without first consulting with a financial counselor. Make sure you fully understand the terms of the loan and plan out future expenses as best you can. Also beware that not all lenders have your best interests in mind.

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