How Do Reverse Mortgages Work?
A reverse mortgage is a tool that lets the borrower convert part of their home’s equity into cash without selling the house or making monthly mortgage payments. Typically, when you’re older, you may not owe that much on your home, and you may have built up a lot of equity, in which case you may be able to pull more money out of it.
Unlike a conventional mortgage, where you make monthly payments to the lender, in this case, the reverse mortgage lender pays loan proceeds to you. You will be required to pay for things like property taxes, homeowner’s insurance, the upkeep of the property, and other obligations outlined in the terms of your loan agreement.
What Is a Reverse Mortgage?
(Reprinted with permission from Finance of America, one of our trusted lending partners)
A reverse mortgage is powerful financial tool that can help seniors unlock home equity and supplement their retirement income. These loans let qualified homeowners ages 62 and older take cash from their home’s equity while still living in the house. The lender pays the homeowner in a monthly payment, in a lump sum, as a line of credit, or a combination of the three.
Borrowers are required to meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. And the borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
Many people continue to have misconceptions about these loans. Reverse mortgages have evolved over the past decade. Now, certain safeguards are in place to protect consumers. Members of the National Reverse Mortgage Lenders Association (NRMLA) are required to adhere to a strict code of ethics and pledge to serve borrowers with integrity.
Also, the U.S. Department of Housing and Urban Development (HUD) requires borrowers who are interested in a home equity conversion mortgage, or HECM (pronounced “heckum”), to go through an approved counseling agency to ensure they fully understand the process, the loan terms, and what all their options are before they apply.
